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Mortgage Glossary

A B C D E F G H I L M N O P R S T V

Agreement of Purchase and Sales

The legal contract a purchaser and a seller go into. We recommend that you have your offer prepared by a professional realtor that has the knowledge and experience to satisfactorily protect you with the most suitable clauses and conditions.

Appraisal

A formal, impartial estimate or opinion of value, usually written, of an adequately described property, as of a specific date, and supported by the presentation and analysis of relevant data.

Assets

What you own or can call upon financially. Often used in determining net worth or in securing financing.

Assumptions and Limiting Conditions

Assumptions made and limiting conditions (if any) imposed on a property which an appraisal report is based on in order to arrive at a value estimate.

Balance Sheet

A financial statement listing assets, liabilities and owner's equity at a specific point in time.

Canada Mortgage and Housing Corporation (CMHC)

CMHC is a federal Crown corporation that administers the National Housing Act (NHA). Among other services, they also insure mortgages for lenders that are greater than 80% of the purchase price or value of the home. The cost of that insurance is paid for by the borrower and is generally added to the mortgage amount. These mortgages are often referred to as 'Hi-Ratio' mortgages.

Capital Risk

The risk of losing all, or part of, an investment.

Capitalization

The conversion of anticipated future income into present value.

Capitalization Rate

The overall capitalization rate is intended to represent a purchaser's estimate of the risk involved in the purchase of an asset and the rate of return that this risk merits from the viewpoint of liquidity, security of income, security of capital and the possibility of capital appreciation. A purchaser would also consider rates of return available from other investment opportunities.

Caveat

A notice registered against the title of a property alerting viewers of the title document that a claim has been made.

Closing Date

The date on which the new owner takes possession of the property and the sale becomes final.

Cost Approach

The Cost Approach is based on the depreciated value of the buildings and improvements, plus the estimated land value as if vacant. Land value is typically determined by market comparison. This approach is an estimation of the amount of money required to produce a property with the same utility as the Subject, in the same location and in the same condition as of the date of appraisal.

Credit Scoring

A system that assesses a borrower on a number of items, assigning points that are used to determine the borrower's credit worthiness.

Date of Valuation

The specific date for which the value of a Subject Property is estimated.

Direct Comparison Approach

An appraisal methodology which Employs the Principle of Substitution which states that a prudent purchaser will not pay more for a property than what it would cost to buy an equally desirable substitute property. It is a method of estimating value for the Subject Property on the basis of the selling prices of comparable properties.

Economic Life

The time frame for which the Subject Property is functional and habitable.

Encroachment

To intrude on the rights or possessions of public or private property, diminishing the size and/or value of the property.

Encumberance

A lien or claim on a property, registered against title.

Fee Simple Interest

The greatest interest an individual can own in land, or complete ownership in law, subject only to the governmental powers of police, escheat, taxation and expropriation.

Foreclosure

The legal process by which a mortgagee's right to redeem a mortgage is taken away, usually because of failing to make payments.

Gross Debt Service Ratio (GDS)

It is one of the mathematical calculations used by lenders to determine a borrower's capacity to repay a mortgage. It takes into account the mortgage payments, property taxes, approximate heating costs, and 50% of any maintenance fees, and this sum is then divided by the gross income of the applicants. Ratios up to 32 % are acceptable.

Highest and Best Use

Highest and Best Use is an economic principle which forms the basis for the value estimate. It is defined as the most economically productive legal use of the land, or that use which conforms to zoning and will reasonably support the highest market value of the property.

Income Approach

An investor purchases property for the benefits (income) that the property is capable of producing. The value of the property depends on its earning power and the Income Approach is a method of estimating the present value of anticipated income benefits. The process of discounting income expectancies to a present worth estimate is called 'capitalization'. This present worth estimate, the result of the capitalization process, is the amount that a prudent, typically informed purchaser would be willing to pay at a fixed time for the right to receive the income stream produced by a particular property.

Income Statement

A financial statement showing the profit or loss sustained by a company during a stated period, including all items of income and expenditure.

Income Tax

The amount of taxable income a person or corporation is required to forward to Revenue Canada.

Inflation

An increase in the supply of currency or credit relative to the availability of goods and services, resulting in higher prices and a decrease in the purchasing power of money.

Interest Adjustment Date (IAD)

The date on which the mortgage term will begin. This date is usually the first day of the month following the closing. The interest cost for those days from the closing date to the first of the month are usually paid at closing. For this reason, many opt for a closing date towards the end of the month.

Latent Defect

A hidden or concealed defect that would not be discovered during the course of a reasonable inspection.

Lease

A contract granting occupation or use of a property during a specific period in exchange for a specified rent.

Lien

A claim or charge on real or personal property as security or payment of a debt, lien obligation or duty.

Market Value

The term 'market value' as defined in the Appraisal Institute of Canada's 'Canadian Uniform Standards of Professional Appraisal Practice', is:

The most probable price which a property should bring in a competitive and open market as of the specified date under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specific date and the passing of title from seller to buyer under conditions whereby:

1) buyer and seller are typically motivated;
2) both parties are well informed or well advised, and acting in what they consider their best interests;
3) a reasonable time is allowed for exposure in the open market;
4) payment is made in terms of cash in Canadian dollars or in terms of financial arrangements comparable thereto; and
5) the price represents the normal consideration for the property and is unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

Marketing Period

Is the measure of time between listing a property for sale and the closing date once sold.

Mortgage

A mortgage is a loan that uses a piece of real estate as a security. Once that loan is paid-off, the lender provides a discharge for that mortgage.

Net Operating Income (NOI)

Profit from a company's normal activities after deducting costs (expenses), but not taxes or interest on long term loans.

Open Mortgage

A mortgage that can be repaid at any time during the term without any penalty. For this convenience, the interest rate is between 0.75-1.00% higher than a closed mortgage. A good option if you are planning to sell your property or pay-off the mortgage entirely. *some conditions may apply

Physical Depreciation

The reduction or loss in value due to wear and tear which may be curable or incurable.

Property Rights Appraised

The property rights appraised in real estate valuation are fee simple title ownership, except for public limitations.

Restrictive Covenant

A restrictriction placed on the use of land.

Subject Property

The property which is the subject of an appraisal.

Term

The period of time the financing agreement covers. The terms available are: 6 month, 1,2,3,4,5,6,7,10 year terms, and the interest rates will be fixed for whatever term once chooses.

Total Debt Service (TDS) Ratio

It is the other mathematical calculations used by lenders to determine a borrower's capacity to repay a mortgage. It takes into account the mortgage payments, property taxes, approximate heating costs, and 50% of any maintenance fees, and any other monthly obligations (i.e. personal loans, car payments, lines of credit, credit card debts, other mortgages, etc.), and this sum is then divided by the gross income of the applicants. Ratios up to 40 % are acceptable.

Triple Net Lease

A lease in which the tenant pays all operating expenses.

Vacancy Allowance

An estimate of the amount of rent which may be foregone due to vacancy.