Payment Frequency

The payment frequency refers to how often a Borrower makes their mortgage payments. There are a few available options; every week, bi-weekly, twice a month or monthly, with monthly being the most common.

P.I.T.H. (Principal, Interest, Taxes & Heat Expenses)

Represents the principal, interest, taxes and heat expenses for a property. P.I.T.H. is also referred to as a monthly housing expense. Lenders use input the P.IT.H. when calculating the debt service ratios to determine how much a Borrower can qualify for.

Posted Rate

The posted rate is a lender's standard advertised interest rate for a mortgage. Hot tip - you may be able to negotiate to obtain a lower interest rate. The Posted Rate is primarily used for calculating Debt Service Ratios and Prepayment Penalties.  Not many mortgages are originated at the Posted Rate.

Power of Sale

Power of Sale provides a mortgage lender with the ability to evict the property occupants and sell the property if the Borrower is in Default of the mortgage. The Lender has a duty to sell the property at a fair market value. Once the property is sold, the former homeowner has the right to any profits from the sale after deducting debt repayment and fees. Lenders do not profit from a Power of Sale. Most lenders would rather the borrower pay off their debt than sell the property under Power of Sale. Power of Sale is a much faster process (can often be completed within six months, depending on the jurisdiction) than Foreclosure and requires less involvement from the court system.

Portable Mortgage

A mortgage that allows you to transfer an existing mortgage from your current home to a new home if you move.

Prepayment Penalties

So you want to speed up your mortgage repayment? It’s important to know that, unless you have an Open Mortgage, penalties are charged if you prepay more principal than is permitted by the Prepayment Privilege in the mortgage contract. The amount of the penalty charged depends on many factors including:

1. the type of mortgage;

2. the amount you want to prepay (or pay off early);

3. the number of months left until the end of your Mortgage Term;

4. interest rates;

5. the Lender’s method of calculation.

For Variable-Rate Mortgages, the prepayment penalty is usually three months of interest on the balance owing.  For Fixed Rate Mortgages, the prepayment penalty is usually the greater of i) three months of interest on the balance owing, or ii) the Interest Rate Differential (or IRD).

The Interest Rate Differential may matter if the interest rate on your Mortgage is higher than the equivalent current mortgage rate offered by the Lender. 

There is no one market standard calculation of the IRD but it is used to assess the difference between the amount of interest that would be collected using the existing rate on your Mortgage and the current Lender mortgage rate for the term remaining of your Mortgage.

The calculation can vary between Lenders so it’s a good idea to review your mortgage contract in order to understand how it is calculated by your Lender. The differences between Lenders are most often due to:

A.    differences in the rate they use for your current contract:

a. Some use the posted rate at the time you signed your mortgage contract;

b.   Some use your current rate or discounted rate as described in your contract (more favorable for the Borrower)

B.   differences in the rate they use for the Lender’s current market rates:

a. Some use the current posted rate for a term with a similar length (more favorable for the Borrower);

b.   Some use the current posted rate for a term with a similar length minus the discount you obtained on your current Mortgage.

Let’s look at an example:

• You have a $200,000 mortgage with a 5 year original term and 4% interest rate. You have 2 years remaining on your term. The current posted bank rate for a 2 year mortgage term is 3% with 2 years remaining The differential is 1% (4% – 3%)

• The IRD penalty will be calculated at 1% of $200K for 24 months – which is equal to $4,000. If this amount is greater than 3 months of interest on the mortgage, then the IRD needs to be paid by the Borrower to compensate the Lender for the lost interest income they will incur if the Borrower prepays the mortgage.

Prepayment Privilege

The right to repay periodically more than the scheduled principal payment without triggering a prepayment charge.

Typical prepayment privileges include:

• the right to make a lump sum payment once per year up to a certain percentage of the principal balance, usually ranging between 10% and 20%; or 

• the right to increase your regular monthly payment by an amount usually limited to between 10% and 20% of the original payment.

In general, the more restrictive the Prepayment Privilege, the lower the Mortgage Rate.  So, if you’re not expecting to have lump sum cash amounts available over the life of your mortgage, you may be better off taking a Mortgage with more restrictive Prepayment Privileges.

Prime Rate

A lender's prime rate is a variable interest rate provided by banks that changes over time. It is usually based on the interest rate the Bank of Canada sets each night. Banks base the interest charge for their variable-rate mortgages on their own Prime Rate. On the other hand, non-bank lenders will base the interest charge for their variable-rate mortgages on the Prime Rate provided by select banks.

Private Lenders

Private Lenders provide pools of capital that are lent out for terms of 1 year at high rates within a private lending market. A and B lenders do not generally participate in this private lending market.

Property Insurance (aka: Home Insurance)

A property insurance policy is required whenever you have a mortgage. Prior to closing a new mortgage, the property insurance provider needs to identify the lender on the policy and you need to provide a copy of the policy to your lender. Property Insurance provides coverage if you experience certain types of damage to your property, your home or its contents.

Property Survey

A legal description of your property including its dimensions and location. An up-to-date property survey may be required by your lender. If it is not available from the seller, your lawyer can obtain the property survey for a fee.

Property Taxes

Property owners pay property tax to the municipality for services like garbage collection, policing and fire protection. The property tax amount is based in part on the property's value.

It is good to be aware that sometimes lenders require a mortgage borrower to add the property tax to their regular mortgage payments. In this case, the lender pays the taxes to the municipality.

PST On Mortgage Default Insurance

If you are required to have Mortgage Default Insurance on your Mortgage (ie. you have a High-Ratio Mortgage) you will need to pay an insurance premium to the insurance provider. This premium is often added to the Mortgage balance on closing. However, certain Provinces charge Provincial Sales Tax (PST) on Mortgage Default Insurance premiums. These taxes cannot be included in your Mortgage balance and need to be paid by you on the Closing Date (included in your Closing Costs). 

The provinces that currently require this, and the tax rate they charge, are Ontario (8%), Quebec (9%) and Saskatchewan (6%). So, if you are buying in one of these provinces be sure to factor in that tax as you prepare yourself for closing costs.