Agreement of Purchase and Sale
An agreement of purchase and sale is a legally binding contract between the buyer and the seller. It includes price, deposit, closing date and other important information about a real estate deal. It sets out the terms on which the buyer must buy, and the seller must sell, the home on the specified date. An offer to purchase, when accepted by a vendor, becomes an agreement of purchase and sale.
Amortization period is the length of time it takes to pay off a mortgage, including interest. It may be between 5 and 30 years. For a new mortgage, the amortization period is usually 25 years.
If you want to pay down your mortgage faster, you can shorten your amortization period and make higher mortgage payments. You can negotiate an amortization as short as 5 years.
If you want smaller mortgage payments, you can increase the amortization period to 30 years maximum. But for high-ratio mortgages, the amortization period is 25 years maximum.
Amortization period differs from mortgage term, which is the length of the contract with your lender. When a term ends, you either pay off your mortgage or renew it if your lender agrees. Terms range from 1 to 10 years, although 4- to 5-year terms are most common.
An appraisal is a report that indicates the estimated value of a property. It’s written by a professional appraiser. You might need an appraisal for financing purposes. As the buyer, you pay the appraisal cost.
A bridge loan is a short-term loan. You may need a bridge loan if you own a home, but need funds from the value of your existing home to close a deal on a new one. This loan is usually only available if you already have a signed, unconditional sale offer on your current home.
Canada Mortgage and Housing Corporation (CMHC)
Canada Mortgage and Housing Corporation (CMHC) provides mortgage default insurance for high-ratio mortgages. A mortgage is high ratio when your down payment is less than 20% of the property value. This insurance is mandatory for federally regulated lenders, like banks. CMHC is a Crown corporation and a leading authority on the Canadian housing market.
See high-ratio mortgage, mortgage default insurance.
With a cash-back mortgage, you get the mortgage principal and a percentage of the mortgage amount in cash. The interest rates on these mortgages are higher than on some other mortgages. You may want a cash-back mortgage if you need money for expenses such as new furniture or repaying loans to cover closing costs.
With a closed mortgage, the borrower may only prepay a limited amount of the principal without paying a prepayment charge. If you have a fixed rate closed mortgage, the prepayment charge is usually 3 months’ interest or the interest rate differential (IRD), whichever is greater. The interest rate for a closed mortgage is generally lower than the interest rate for a comparable open mortgage.
See interest rate differential (IRD), prepayment, prepayment charge.
Closing costs are expenses you pay to close a property purchase and sale. As the buyer, your closing costs include land transfer tax, legal fees and any costs the lawyer pays on your behalf, such as title insurance, survey costs, courier charges, among others. The seller’s closing costs include real estate commission (if applicable), legal fees and any costs their lawyer pays on the seller’s behalf.
See title insurance, survey.
Closing date (or closing day)
On the closing date, you pay the balance of the home purchase price to the seller, and the seller transfers title or ownership of the property to you.
If 2 or more people are borrowers on a mortgage, they are co-borrowers.
A charge, or mortgage, is the document registered on title to secure a loan. A collateral charge may secure more than one loan or line of credit.
See collateral charge.
In a commercial mortgage, the mortgaged property is an income-producing commercial building rather than a residence. Commercial mortgages are usually much larger than residential mortgages. Lenders secure these loans with mortgages registered on title against multi-unit residential buildings, retail plazas, shopping centres, office and industrial buildings. Lenders review the commercial property’s appraised value and monthly income generation to determine how much the owner, often a business or corporation, may be approved for.
A conditional offer is an offer to buy a property only if certain conditions are met. For example, an offer could be conditional on the property passing a home inspection, or on the buyer selling their current home by a certain date.
A construction mortgage is a mortgage that finances the construction of a new home or other building on a property.
A conventional mortgage is a mortgage that isn’t insured by CMHC or another mortgage default insurer.
A convertible mortgage is a type of short-term mortgage that can be converted to a longer-term mortgage without paying a prepayment charge. If you have a convertible mortgage, you might choose to convert it to a longer-term mortgage when interest rates fall.
See closed mortgage.
A credit report is a record of your credit history. Data includes current and past financial debts, up to 7 years, and a record of debt payment. A lender uses a credit report, among other details, to decide whether to accept or deny your mortgage application. Lenders get credit reports from credit bureaus, like Equifax and TransUnion.
Creditor insurance (also called mortgage critical illness insurance, mortgage disability insurance or mortgage life insurance, CUMIS)
Creditor insurance can cover your mortgage payments, or reduce or pay off your mortgage in the event of death, critical illness, disability or job loss.
See mortgage critical illness insurance, mortgage disability insurance, mortgage life insurance.
Debt ratios (also called debt service ratios)
Debt ratios measure your ability to repay a mortgage by ensuring debt doesn’t exceed a certain percentage of your income. Lenders and mortgage insurers use 2 debt-service ratios to determine if you qualify for a mortgage: gross debt service ratio (GDS) and total debt service ratio (TDS).
See Canada Mortgage and Housing Corporation (CMHC), gross debt service ratio (GDS), total debt service ratio (TDS).
A deed is a legal document written and signed by the seller. It transfers property ownership from the seller to the buyer.
A deposit is the amount of money you give a seller when you submit a signed agreement of purchase and sale to buy a property. The deposit is written into the agreement of purchase and sale. When the sale closes, the deposit goes towards part of the total purchase price.
A down payment is the amount of money, including deposit, you put towards the purchase price of a property. Minimum down payments vary from 5% to 20%, depending on location. If your down payment is less than 20% of the property value, your mortgage is high-ratio and you need to buy mortgage default insurance.
See Canada Mortgage and Housing Corporation (CMHC), high-ratio mortgage, mortgage default insurance.
See home equity.
A firm offer is an unconditional offer to buy a property. Often, sellers prefer firm offers because the home sale is more likely to go through without major holdups.
See agreement of purchase and sale, conditional offer, home inspection.
First-time Home Buyers’ Tax Credit (HBTC)
See Home Buyers’ Amount (HBA).
If you have a fixed-rate mortgage, your interest rate and monthly payments stay the same for the entire mortgage term. If mortgage interest rates go up during the term, you’re protected because your rate stays the same.
See interest, prime interest rate, variable-rate mortgages.
If you default on your mortgage payments, your lender takes a legal action called foreclosure. Your lender takes over your property under a legal process called power of sale. You receive notice and have the chance to bring the mortgage back into good standing. If not, the lender can sell your property to recover money you owe them, including principal, interest, legal fees and charges.
Gross debt service ratio (GDS)
The gross debt service ratio (GDSR) is the ratio or proportion of a borrower’s housing-related debt to their income. Lenders take GDSR into account when considering whether to approve a mortgage application.
Gross household income
Gross household income is the total income, before deductions, for all people who live at the same address and are applicants on a mortgage.
A high-ratio mortgage has a principal greater than 80% of the property value. If you have a high-ratio mortgage, you need mortgage default insurance because this is a high-risk loan. If you default on the mortgage, the insurance pays the lender for certain losses. Not all lenders offer high-ratio mortgages.
See Canada Mortgage and Housing Corporation (CMHC), mortgage default insurance, principal.
Home Buyers’ Amount (HBA) for first-time home buyers
The federal HBA may provide a non-refundable tax credit for first-time home buyers. The federal tax credit rate is 15%, so claiming the $5,000 HBA could lower your income tax by $750. You can generally claim the HBA if you or your spouse or common-law partner acquired a qualifying home, provided you didn’t live in a home that either of you owned in the year the home was acquired or the prior 4 years.
Home Buyers’ Plan (HBP)
The Home Buyers’ Plan (HBP) is a Canadian government program. It lets eligible individuals1 withdraw up to $35,000 each from their Registered Retirement Savings Plan (RRSP) to buy, build or maintain a qualifying home. You don’t have to pay income tax on the funds as long as you repay the full amount you withdraw from your RRSP over the next 15 years. If the full $35,000 is withdrawn, the minimum annual repayment is just $2,333. Conditions apply.
1 Eligible individuals are:
- first-time home buyers and their spouse or partner; or
- those living separately and apart from a spouse or common-law partner for at least 90 days and started living separately and apart in the preceding 4 years as a result of a relationship breakdown.
Home Buyers’ Tax Credit (HBTC)
See Home Buyers’ Amount (HBA).
Your home equity is the value of your home, minus total outstanding debt — such as mortgages and liens — registered against title to the property. Calculate as follows:
Property value – total debt secured by the property = home equity
Example: If your property is worth $500,000 and the mortgage is $400,000, your home equity is $100,000 ($500,000 – $400,000 = $100,000).
Your home equity increases as the debt secured by the property decreases.
Buyers, sellers, owners or anyone who needs independent information about a property can hire a Registered Home Inspector (RHI) to do a home inspection.
The inspection confirms a home’s condition, identifies needed repairs and helps you decide whether to buy a property. Lenders may ask for a home inspection report when you apply for a mortgage.
See property insurance.
Interest is the money you pay to your lender for using the funds you borrow. Interest is charged from the day you get the money. That day is known as the funding date.
See interest adjustment.
The interest adjustment amount is a one-time interest expense. You pay it when you get mortgage funds before the interest adjustment date (IAD) shown on your mortgage document. You may also pay an interest adjustment amount if you change your mortgage payment date or mortgage payment frequency during the mortgage term.
Many borrowers set their mortgage payments to monthly on the first of the month. If you buy a home on another day, your lender calculates interest from your closing day to the nearest first day of the month. As the borrower, you pay the interest adjustment amount.
Example: If you buy a home on March 15 but mortgage payments are on the first of the month, the IAD is April 1. You pay interest only — the interest adjustment amount — for the time between March 15 to April 1. Your first regular mortgage payment is one month after the IAD; in this case, May 1.
See closing date, interest, interest adjustment date, mortgage payment.
Interest adjustment date (IAD)
The day your lender starts to calculate interest on the mortgage principal is the IAD. Normal interest is separate from the interest adjustment amount. You pay this interest according to your mortgage payment schedule.
See interest, interest adjustment.
Interest rate differential (IRD)
The interest rate differential (IRD) is a type of prepayment charge you may pay to your lender when you pay all or part of the mortgage before the term ends. For fixed-rate closed mortgages, prepayment charges are usually 3 months interest or the IRD, whichever is greater. Your mortgage document explains how the IRD is calculated.
See closed mortgage, prepayment, prepayment charge, term.
Land transfer tax
Land transfer tax is a closing cost you pay the government on your closing date. The tax is calculated based on the property’s purchase price. Most provinces charge a provincial land transfer tax and some cities charge an additional municipal land transfer tax. Taxes vary by province and first-time home buyers are sometimes exempt from part of the cost. Find more details about land transfer tax on provincial and municipal websites.
See closing costs, closing date.
Legal fees and disbursements
Legal fees and disbursements are part of the closing costs. Buyers and sellers pay them to their lawyers or notaries to close a purchase, sale or mortgage transaction. These fees vary by province and are subject to GST or HST. You should review all fees and other costs associated with your legal services.
See closing costs.
See conventional mortgage, mortgage.
Lump sum payment
The maturity date is when your mortgage term ends. This is when you either renew your mortgage for a new term, if your lender agrees, or pay it off completely.
Mobile Mortgage Advisor
A Mobile Mortgage Advisor is a mortgage expert who meets at a time and place that’s convenient for you to provide expertise and answer questions about mortgages.
A mortgage is a loan secured by a lien registered on title to your home or other real estate. You repay the loan according to specific terms that include interest rate, payment amount and timeline. These details are set out in the mortgage document. If you can’t repay the loan, your lender has the right to take possession of your property and sell it to collect any money you owe them.
See commercial mortgage, construction mortgage, conventional mortgage, convertible mortgage, high-ratio mortgage, open mortgage, recourse mortgage, reverse mortgage, title, variable-rate mortgage.
See amortization period.
With mortgage assumption, you take over, or assume, the seller’s mortgage on the purchased property. You accept full responsibility to pay the mortgage according to the existing mortgage terms. You need the lender’s approval before you can assume the seller’s mortgage.
As the buyer, mortgage assumption may be a good option for you if market interest rates are higher than the interest rate in the seller’s mortgage on the closing date.
Mortgage assumption may be a good option for the seller if they’re selling their home before the mortgage maturity date and not getting a mortgage on a new property. Mortgage assumption helps the seller avoid prepayment charges.
A mortgage broker works on your behalf and searches for the best mortgage deal among various lenders. When you accept a mortgage, the broker completes the application and applies for the loan on your behalf.
Mortgage critical illness insurance (CUMIS)
Mortgage critical illness insurance is optional creditor’s group insurance that can reduce or pay off your mortgage — up to a maximum benefit amount — if you’re diagnosed with cancer, acute heart attack or stroke.
Mortgage default insurance
Mortgage default insurance protects lenders when borrowers can’t repay their mortgage. You need this insurance if you have a high-ratio mortgage.
See Canada Mortgage and Housing Corporation (CMHC), high-ratio mortgage.
Mortgage disability insurance (CUMIS)
Mortgage disability insurance is optional creditor’s group insurance that can pay up to a maximum benefit amount toward your mortgage if you can no longer work due to a disability.
See creditor insurance.
When you pay off your mortgage in full, your lender issues a mortgage discharge document that’s registered on title to your property. It certifies the property is completely free from that mortgage debt.
Mortgage life insurance
Mortgage life insurance is optional creditor’s group insurance that can reduce or pay off your mortgage — up to a maximum benefit amount — in the event of your death.
See creditor insurance.
Mortgage payment (also called regular payment amount)
Mortgage payments are the regular payments you make to repay your loan. Payments can be monthly, semi-monthly, biweekly or weekly. They include principal and interest.
With mortgage pre-approval, you’re asked questions that closely match those of a full mortgage application. The lender does a credit check. The lender pre-approves you for a maximum amount and gives you a mortgage pre-approval certificate, which is subject to several conditions. This lets you know how much money your lender may lend you, but it doesn’t guarantee final approval.
See credit report, pre-approved mortgage certificate.
Mortgage pre-qualification is a quick assessment process. The lender assesses your financial information, including debt, income and assets. You get an estimate on the mortgage amount you may be approved for. If you’re pre-qualified, your lender has only done a basic review of your finances. You must still provide documents and more financial details before getting pre-approved for a mortgage.
See mortgage pre-approval, pre-approved mortgage certificate.
Mortgage principal is the amount of money you borrow from a lender. If a mortgage is for $250,000, then the mortgage principal is $250,000. You pay the principal, with interest, back to the lender over time through mortgage payments.
You get a written record of your mortgage status, often on an annual basis, from your lender. The statement includes how much you paid in principal and interest to date, plus the remaining principal on the mortgage.
A mortgagee is the lender.
A mortgagor is the borrower.
Multiple Listing Service (MLS)
Multiple Listing Service (MLS) is a database of real estate listings where realtors advertise and search for properties for sale on behalf of clients.
Offer to purchase
See agreement of purchase and sale.
You can prepay open mortgages, in part or in full, without a prepayment charge. Open mortgages usually have higher interest rates than closed mortgages. But open mortgages are also flexible. If rates start to increase, you can easily pay off an open mortgage and switch to a closed one.
See closed mortgage, prepayment, prepayment charge.
Porting a mortgage (also called mortgage portability)
Mortgage portability lets you move, or transfer, an existing mortgage to a new property. The mortgage term, outstanding balance and interest rate stay the same. Not all mortgages are portable, and the lender’s approval is required.
The posted rate is a lender’s standard advertised interest rate for a mortgage product. You may be able to negotiate with your lender for a lower interest rate.
See also interest, qualifying rate.
Pre-approved mortgage certificate (also called mortgage pre-approval certificate)
A pre-approved mortgage certificate confirms you’re pre-approved by a lender to borrow a maximum amount at a guaranteed interest rate. The pre-approval certificate is subject to several conditions and expires after a limited time, usually up to 120 days. If the conditions are satisfied and your closing date is within that 120-day period, your guaranteed interest rate won’t change. With a mortgage pre-approval certificate, you can shop for your new home with confidence.
See mortgage pre-approval.
Prepaid property tax and utility adjustments
You reimburse the seller for any property taxes or utilities they paid before the closing date.
Example: If a property closes on June 1 and the seller paid taxes and utilities to June 30, you pay the seller those expenses from June 1 to June 30.
Your lawyer makes these adjustments on a document called the statement of adjustments.
See closing date, statement of adjustments.
Prepayment (also called lump sum payment)
A prepayment is when you pay off some or all of the mortgage before the term ends. You can pay off most open mortgages without paying a prepayment charge. When you prepay a closed mortgage, you usually pay a prepayment charge to your lender. But most closed mortgages let you make an annual prepayment of 10% to 20% without a charge.
See interest rate differential, open mortgages, prepayment charge.
When you pay all or part of a closed mortgage before the term ends, you may need to pay a prepayment charge to the lender. The terms for prepayment charges are defined in the mortgage agreement. Prepayment privileges are part of open and closed mortgages.
See closed mortgage, mortgage, open mortgage.
Prime rate (also called prime interest rate or prime lending rate)
A lender’s prime rate is usually based on the interest rate the Bank of Canada sets each night. It can change at any time. Lenders usually base the interest charge for their variable-rate mortgages on their prime rate.
See interest, variable-rate mortgages.
See mortgage principal.
Property insurance (also called home insurance)
During your mortgage term, you need property insurance on your home. The lender must be named on the policy. Property insurance covers the replacement cost of the home in case of fire, windstorms or other disasters. The lender needs proof of property insurance before releasing the mortgage funds.
You pay property tax to your municipality for services like garbage collection, policing and fire protection. The property tax amount depends in part on your property’s value. You can add the tax to your regular mortgage payments. In this case, your lender pays your taxes to the municipality.
A qualifying rate is the rate a lender uses when determining whether you qualify for the mortgage you applied for. Your lender uses this rate to calculate your debt-service ratio — the ratio between your debt and income. This helps your lender determine if you can repay the mortgage.
See down payment, high-ratio mortgage, posted rate.
A recourse mortgage lets your lender go after your property or other assets not used as mortgage collateral if you default on your mortgage.
Your lender can sell your property to recover the amount owing. If the sale price doesn’t pay off the amount owing, the lender can sue you for the shortfall.
Refinancing (also called renegotiating)
Mortgage refinancing is a transaction that replaces an existing mortgage before it matures with a new one, on different mortgage terms. In some cases, prepayment charges apply. Refinancing is a financial tool you can use to consolidate debt and access the equity in your home to pay for other expenses.
See prepayment charge, renewal.
Registered against title (also registered on title)
Regular payment amount
See mortgage payment.
Renewal (also called renewing)
When a mortgage term ends, you may negotiate another term with your lender. If you don’t renew the mortgage, you must pay it off in full.
If you’re over age 55, a reverse mortgage lets you borrow up to 50% of your home’s value. You don’t make payments on a reverse mortgage. But interest grows on the mortgage debt until you sell the home or pass away.
If you already own a property with a mortgage, you may be able to take out a second mortgage. You may want additional funds to renovate or for personal reasons. A second mortgage is one way to take money out of a home’s growing equity. Second mortgages carry more risk than first mortgages.
See home equity.
See conventional mortgage, mortgage.
Statement of adjustments
The statement of adjustments is a document prepared by the seller’s lawyer. It states the purchase price, deposit amount and financial adjustments needed for prepaid taxes, utilities or condo fees. When these calculations are final, you know exactly how much to pay the seller on the closing date.
See closing costs, closing date, prepaid property tax, utility adjustments.
Survey (also called property survey)
A survey is a property plan that identifies property boundaries, lot size and building position. It also shows if there are any overhanging structures or shared driveways that could impact property value. A professional land surveyor prepares the survey. Your lender may ask you for a current survey of the property during the mortgage application process.
A term is how long you commit to your mortgage rate, details and conditions with a lender. When a term ends, you pay off the mortgage or renew it for another term if your lender agrees. Terms range from 1 to 10 years, but 4- to 5-year terms are most common.
See amortization period, renewal.
Title is the ownership you buy when you purchase property. Lenders require clear “title” to the property before they release mortgage funds. Any issues or concerns about the property’s title — fraud, survey errors, municipal work orders, zoning violations and encroachments — found through the lawyer’s title search must be resolved before closing. Mortgages are “registered against title” or “registered on title” to protect the lender’s financial interest in the property.
See deed, title insurance.
Title insurance protects buyers and lenders from defects on title discovered after closing. Title defects could include title fraud, survey errors, municipal work orders, zoning violations and encroachments. Consult with your lawyer about title insurance. If you buy title insurance, it’s added to your closing costs.
See closing costs, title.
Total debt service ratio (TDS)
The total debt service ratio (TDSR) is the percentage of gross annual income required to cover all other debts and loans in addition to the cost of servicing the property and the mortgage (principal, interest, taxes, heat, and more).
See gross debt service ratio (GDS).
Transferring a mortgage
See porting a mortgage.
If you have a variable-rate mortgage, your interest rate changes according to a financial index. Your mortgage agreement explains how and when the rates change. Monthly payments may stay the same. But if interest rates go down, more of your payment goes towards the principal. If rates go up, more of your payment goes towards the interest. See prime rate.
Shannon Luscombe, Manager, Retail Advisory with North Peace Savings and Credit Union with a decade of experience working within the Credit Union system. She moved from Vancouver Island in 2019 to be with her husband who works in the Oil & Gas industry, bringing with her, Credit Union knowledge and experience to join the NPSCU team. She has a passion for helping Members succeed in achieving their financial goals, by sharing strategies and advice gained…read more