Canadian Mortgage Information

Glossary of Terms


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Adjustments on Closing

There are two types of adjustments for which a buyer can be charged on closing;

Prepaid services. Where the sellers have prepaid property taxes or certain utilities, the buyers can be charged for the amount of prepayment on a pro-rata basis, depending on the date of occupancy. For example, if the sellers have paid the property taxes to the end of the year, and the sale closes on October 15th, the purchasers will be charged with an adjustment of 77/365'ths (the number of days remaining in the year) of the total paid for the year.
Interest. This is the amount of interest required to be prepaid up to the Interest Adjustment Date (IAD). IAD is the point at which the mortgage interest starts accumulating "in arrears". In Canada all mortgage interest is calculated and paid after the period to which it applies. This differs from the way in which rental and lease payments are calculated, which is "in advance". The good news on this one is that if you prepay for say 3 weeks you won't have to make your first payment for almost two months. Also, if you take a biweekly payment term, the longest interest adjustment period is less than two weeks, by definition.

Amortization

The process of paying off the principal balance owed of the mortgage through scheduled, systematic repayments of principal and extra payments of principal at irregular intervals. Usually associated with a target period (the standard being 25 years) over which the initial blended payment is calculated. The maximum amortization period available in Canada is 40 years.

Appraisal

This is an estimate of the current value of the property for the lender (the 'subject property'), using one or both of the following techniques;

Market value comparison approach: The majority of residential appraisals use this technique, comparing recent sales of similar properties ('comparables' or 'comps' in real estate jargon) and adding and subtracting the differences in value of the same features in the subject property. For example, if a house of the same size on the same street and in the same condition as the subject property recently sold for $200,000, but this 'comparable' had a triple garage and a finished basement and the 'subject' does not; the appraiser calculates the market value of these features (say, $12,000 in total) and deducts this amount from $200,000, giving an 'adjusted value' of $188,000. This is usually done with at least three 'comparables' and either averaged or the middle ('median') value used.
Depreciated cost approach: This technique is a supporting measurement of value used by many appraisers, whereby the land value is estimated and added to an estimate of the depreciated building value. Where there are few comparables available, relatively more weight might be given to this method.

Assessment

The "assessed" value of a property is a historical, static estimate of the value of your property used by a municipal (local) government as a basis for calculating annual property taxes. An "assessment notice" from the municipality contains the "assessed value" and when multiplied by the current "mill rate" the property taxes for the year can be calculated. In some municipalities, the mill rate is provided on the assessment notice and in others it is provided separately

Assignment of Interest

Most Provinces allow a legal assignment of interest in a mortgage to have full legal effect without having to discharge and re-register the existing one. This is particularly useful in:

Switch situations, where the costs of transferring lenders would otherwise be very high.
Second mortgage situations where a postponement may be difficult to obtain.

Assumable Mortgage

The A mortgage which a qualified buyer can take over from the current owner of a property upon its sale. Assuming a mortgage can provide a buyer with a below market interest rate, (if rates are now higher), as well as saving on the legal costs of creating and registering a whole new mortgage. "Assumption" entails a simple amendment to the mortgage document registered on title (see "switch").