Also referred to as being “underwater,” having
negative equity means your
mortgage balance is greater than the value of your house.
The risk of this is higher for those who make smaller down payments, such as 5%. In that case, it only takes
a small depreciation in home value for the equity
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to turn negative.
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Notice of Assessment (NOA)
A
Notice of
Assessment (NOA) is a detailed tax statement sent annually by the Canada Revenue Agency. It includes
information about an individual’s taxable income information for the current year, taxes owed, taxes paid,
tax refund amount and RRSP contribution room. Lenders commonly request the
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the last two years of NOAs for borrowers who are self-employed or on commission.
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o
O.A.C.
The acronym for “on approved credit.” This is a typical disclaimer on advertised
mortgage rates.
OIS
An
Overnight Index
Swap (OIS) is an;interest;rate;derivative in which two parties agree to exchange
(swap) a specific fixed interest rate obligation for a floating rate obligation linked to the overnight
rate.
This instrument is popular amongst financial institutions as a way to hedge risk,
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since participants can use the OIS to hedge their exposure to short-term interest rate movements.
OIS are handy for tracking Bank of Canada rate expectations. For example:
- A 90-day OIS essentially reflects the market’s view of the average Bank of Canada overnight rate over 90 days.
- A one-year OIS tracks rate expectations one year out.
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Open Mortgage
In contrast to a closed mortgage, an
open mortgage can be repaid or
refinanced at any point during its term without penalty. Borrowers pay for the flexibility of an open
mortgage with a higher rate.
Spy Tip: At today’s rates, open mortgages generally don’t make sense if you plan to hold a
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In contrast to a closed mortgage, an open mortgage can be repaid or refinanced at any point during its term without penalty. Borrowers pay for the flexibility of an open mortgage with a higher rate.
Spy Tip:
At today’s rates, open mortgages generally don’t make sense if you plan to hold a mortgage for longer than 6-9 months.
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OSFI
OSFI stands for "The Office of the
Superintendent of Financial Institutions." It is Canada's banking regulator.
Note: ;OSFI regulates federal banks, trusts and insurance companies. Credit unions are provincially
regulated, however, and therefore not directly regulated by OSFI.
Mortgage
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Finance Companies (e.g., First National, MCAP, etc.) get most of their funding from banks and must default insure most of their mortgages, and are therefore indirectly subject to OSFI rules.
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OTBE
Short for "other things being equal."
Overnight Index Swap (OIS)
An Overnight Index Swap (OIS) is an;interest;rate;derivative in
which two parties agree to exchange (swap) a specific fixed interest rate obligation for a floating rate
obligation linked to the overnight rate.
This instrument is popular amongst financial institutions as a way to hedge risk,
Read more..
since participants can use the OIS to hedge their exposure to short-term interest rate movements.
OIS are handy for tracking Bank of Canada rate expectations. For example:
- A 90-day OIS essentially reflects the market’s view of the average Bank of Canada overnight rate over 90 days.
- A one-year OIS tracks rate expectations one year out.
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p
Percentage Point (pp)
A percentage point is a unit of one percent. For example, a change from 30% to
35% is an increase of five percentage points.
See also: Basis points
Portable Mortgage
A
Portable
Mortgage allows the borrower to transfer the mortgage balance, terms and interest rate to a new
property without penalty. When a mortgage is ported it remains with the same lender. Lenders typically give
borrowers anywhere from 1 day to 120 days to port their mortgage.
Spy Tip:
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Always check your lender’s porting policy if there’s a chance you’ll move before maturity. It is very difficult to line up the closing date of your old and new properties. So look for at least a 30- to 60-day porting policy (aka. Port gap) if there’s a chance you may move during your term.
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Posted Rate
A lender's advertised mortgage rate, typically an undiscounted rate.
Posted rates are used mainly for:
penalty calculations
cashback mortgage calculations
determining rate reductions for borrowers who are already approved, in the case where rates are falling.
Pre-Approval
As the term implies, a
pre-approval is an initial
evaluation of a homebuyer’s borrowing qualifications. This is used to determine whether someone might get
approved, as well as the maximum amount they might be approved for.
Spy Tip: A pre-approved mortgage is always subject to lender
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conditions. If you’re putting down less than 20%, a pre-approval should never be a substitute for inserting a financing condition in your purchase agreement. That’s because insurer approval is required and insurers never review pre-approvals. Insurers may later decline an applicant for any number of reasons, despite the lender’s approval.
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Prime Mortgages (“A” Mortgages)
Prime mortgages, also known as “A” mortgages, are considered the highest quality
and the lowest risk due to the strong credit standing of the borrower.
See also: Subprime mortgage
Prime Rate
Historically prime rate has referred to the interest rate banks charged their
most credit-worthy customers or corporations. That is not always the case today.
Today it is generally a reference rate upon which other rates are quoted. For example, fluctuating variable
rates and lines of
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credit usually have rates that are based on prime +/- a specified percentage (e.g. Prime – 0.75% or Prime + 0.50%).
Prime rate is closely linked to the Bank of Canada’s overnight rate. Prime rate generally rises and falls with the overnight rate, but not always. All lenders set their own values for this rate but they generally match the major banks.
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Principal
Principal
refers to the amount of money that was borrowed, or that still remains on the loan. Mortgage payments are
split into two portions. One part of the payment goes towards interest charges, and the remaining portion
goes towards paying down the principal balance of the loan.
q
Qualifying Rate
Also referred to as the Benchmark
Qualifying Rate, it's the rate
lenders use to determine how much of a mortgage payment you can afford.
On
insured mortgage, you must prove
you can afford a payment at the Mortgage Qualifying Rate (MQR). This rate;equals the mode average of
the Big 6 banks’
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5-year posted rates.
On an uninsured mortgage, you must prove you can afford a payment at the Mortgage Qualifying Rate (MQR) or your contract rate plus two percentage points, which ever is higher.
Lenders test borrowers at these higher rates to ensure they can afford their payments if rates rise.
Spy Tip:There’s no way to get around the qualifying rate if you’re putting down less than 20% and need an insured mortgage. But if your mortgage is conventional and the qualifying rate is keeping you from getting a higher loan amount, consider a credit union which offers less stringent qualifying rules. Another strategy is opting for a longer amortization.
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Quantitative Easing
Quantitative
easing occurs when a central bank purchases securities (like government bonds) in the open market in
order to lower interest rates and stimulate the economy.
Quick Close
A
quick close
mortgage is one that closes in a short period of time, typically 30-45 days.
Quick closings often come with lower rates because the lender doesn’t have to hedge its rate guarantee as
long.
r
Readvanceable Mortgage
A
readvanceable
mortgage has a built-in line of credit that lets you re-borrow off the line of credit after you pay
down the mortgage portion.
Readvanceable mortgages provide homeowners with a low cost source of borrowing for renovations, investing,
business use and emergencies, among other
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things.Depending on the lender, the line of credit limit can be increased automatically as the mortgage principal is paid down, or increased manually (which requires lender approval). Manual readvanceables are far less flexible and convenient.
Synonyms:
Auto-readvanceables, Auto-readvanceable
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Refi
Short for "refinance."
Reverse Mortgage
A
reverse
mortgage is a mortgage product for seniors that allows them to withdraw up to half the equity from
their home in tax-free payments, typically for the purpose of supplementing retirement income. Other reasons
for using a reverse mortgage include home renovations, debt repayment,
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investment and tax purposes.
The homeowner is not required to make any monthly payments towards the loan, however interest accrues monthly and is due when the house is sold or all borrowers die.
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s
Securitization
Securitization
refers to the process of bundling multiple mortgages into packages
(pools) and selling those pools to investors.
Selling their mortgage assets like this allows lenders to raise new capital, which in turn can be lent out
to new borrowers.
Smith Manoeuvre
The
Smith
Manoeuvre is a leveraged investing technique whereby you:
Get a HELOC that's linked to your mortgage (a.k.a.; A "readvanceable mortgage" where the available
HELOC credit increases as you pay down your mortgage portion.)
Use that freed-up HELOC room to reborrow the principal
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The Smith Manoeuvre is a leveraged investing technique whereby you:
- Get a HELOC that’s linked to your mortgage (a.k.a. A “readvanceable mortgage” where the available HELOC credit increases as you pay down your mortgage portion.)
- Use that freed-up HELOC room to reborrow the principal that you pay down on your mortgage
- Buy income-producing investments with that borrowed money
- Write off the borrowing costs
- Use the tax refund to pay down your mortgage quicker.
The Smith Manoeuvre was named after financial strategist and father of the tactic, Fraser Smith, in 2002.
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Spread
A
spread is the difference between
two interest rates.
From a lender’s perspective, the most important “spread” is the difference between the mortgage rate they
offer consumers, and their cost for those funds.
Other spreads include:
The fixed - variable rate spread
The 5-year
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- The fixed – variable rate spread
- The 5-year fixed – 5-year bond yield spread (a rough gauge of lender margin on fixed-rate mortgages)
- The variable – BA spread (a rough gauge of lender margin on variable-rate mortgages)
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Subprime Mortgage (“B” Mortgage)
A subprime or “B” mortgage refers to a mortgage loan made to a less creditworthy
borrower. This can be someone with a low
credit score, high debt ratios or
insufficient proof of income. To account for the greater risk, lenders charge a premium on the interest rate
and carefully scrutinize the
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marketability of the property since they rely heavily on its equity.
See also: Prime mortgage, Alt-A Mortgage
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t
Target Rate
The overnight
target rate
is also known as the Bank of Canada’s “key interest rate” or “key policy rate.” It is a foundational
interest rate that influences virtually all other rates in Canada.
The Bank of Canada has eight fixed dates throughout the year on which it determines whether to
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cut, hike or leave the target rate unchanged.
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Teaser Rate
A
teaser rate
is a below-market rate for a limited introductory period, after which time the rate increases to a higher
level.
A teaser rate is used by mortgage providers as a way to entice new customers.
Term
Term refers to length of the
mortgage contract. It is the amount of time (generally measured in years) that the conditions of the loan
remain in effect. At the end of the term, the mortgage balance either needs to be repaid in full, renewed
for another term, or refinanced.
Term and
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amortization are often confused, but are not the same.
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Tied Selling
Coercive
tied selling
is when a lender makes you believe your mortgage will not get approved unless you agree to buy other
products and services from that lender. This is illegal under;Section 459.1 of Canada's Bank Act.
This is not to be confused with "Preferential Pricing," which is when
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a lender gives you a better mortgage rate in exchange for you buying other financial products. Preferential pricing is also called bundled pricing. It might be offered, for example, if you open a new chequing or investment account when getting your mortgage.
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Total Debt Service (TDS) ratio
The percentage of the borrower’s income needed to cover all housing costs
(mortgage payments, property taxes, heat and half of any condo fees), plus the cost of servicing other debts
(car payments, credit card interest, lines of credit, loans, etc.).
Traditionally, the maximum allowable
TDS
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ratio has been approximately 40%. Today, it can be as high as 44% on insured mortgages (for applicants with high credit scores). A minority of lenders allow even higher TDS ratios on conventional mortgages.
You can estimate your own TDS ratio here.
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Transfer (Switch)
A transfer (or "switch" as it's often called) is when you move a mortgage from one lender to another.
Generally speaking:
Generally, only regular (a.k.a. "standard charge") mortgages can be transferredReadvanceable mortgages
(a.k.a. collateral charges) must be re-registered and
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A transfer (or "switch" as it's often called) is when you move a mortgage from one lender to another.
Generally speaking:
- Generally, only regular (a.k.a. “standard charge”) mortgages can be transferred
- Readvanceable mortgages (a.k.a. collateral charges) must be re-registered and therefore they typically cannot be “switched” without an extra cost or rate premium
- If a mortgage is being transferred to a new lender, the mortgage amount, amortization and people on title must generally remain the same
- There are exceptions:
- Sometimes you can roll in up to $3,000 of closing costs in the new lender’s mortgage
- If you’ve made prepayments, sometimes you can reset your amortization back up to what it would have been without those prepayments
- Transfers are also referred to as “assignments
Synonyms:
transfers, switches
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Trigger Rate
A
trigger rate
is the rate, that if surpassed, requires a variable-rate borrower to increase her payment. Trigger rates are
linked to prime rate. They ensure that variable-rate borrowers with fixed payments always cover at least the
interest due to a lender is fast rising rate
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environments.
Trigger rates have nothing to do with adjustable-rate mortgages, which have payments that rise and fall with prime rate.
Spy Tip: Prime rate would typically have to rise 2% or more in order for the trigger rate to be exceeded.
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Type-A Cottage
A
type-A
cottage is a winterized cottage that's built on a permanent foundation below frost line,;with
year-round road access, a kitchen, an indoor bathroom, a permanent heat source and potable running water.
A
type-B cottage is one that doesn't
meet the above criteria. For example, it may
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have seasonal or boat-only access, no permanent heat source, a foundation of pilings or concrete block.
Type-A cottages can be mortgage with as little as 5% down while type-B cottages require at least 10% down and usually entail higher interest rates. Note that not all lenders offer cottage financing.
Synonyms:
Type-B Cottage, type-A cottages, type-B cottages, type A cottages, type B cottages
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u
Underwriting
Underwriting
is the process of assessing the risk of lending to a particular borrower.
Mortgage applications are always underwritten before a lender approves or declines an applicant. During the
underwriting process,;lenders typically consider the borrower's employment, provable income
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credit history, ratio of debt to income, property characteristics and equity, among other things.
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Uninsured
This refers to a mortgage that does not have default insurance.
Default insurance is required for any normal;mortgage with less than 20% equity.
v
Variable Rate Mortgage (VRM)
This is a mortgage with an interest rate that is not fixed. Its rate typically
changes when its benchmark (usually prime rate) changes.
A VRM is often referred to as an
adjustable rate mortgage (ARM). In
reality, there is a slight difference. A VRM has a fixed payment while an ARM has a
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payment that floats with the interest rate.
See also: Fixed rate mortgage
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y
Y/Y (YOY)
Short for “year over year,” it is used to compare data from the same period a
year earlier.
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