GLOSSARY OF REAL ESTATE TERMS
Adjustments: reimbursements to the seller for goods or services that are paid for by the seller in the past but are consumed after the buyer obtains possession of the property. For example, if the seller of a home pays property taxes on an annual basis and is selling a home half-way through the year, he/she would compensate the buyer for the pro-rated amount of tax paid during the first half of the year. The agreed purchase price is not the actual price that the buyer pays as it does not take into account adjustments. Adjustments are included in a document called the Statement of Adjustments and usually includes such expenses as property taxes, utility bills and heating oil, if applicable.
Appurtenant: in real estate law, it is a right or restriction that goes along with the particular property. For example, a right of way allowing a neighbour to access their property by cutting across another property. The right of way is appurtenant to the property.
Annual Percentage Rate (APR): the interest rate for a year, including additional fees and expenses.
Assumability: an assumable mortgage allows a borrower to transfer an existing mortgage to the new homeowner when the property is sold. The lender will usually have to approve the new homeowner. When a borrower’s mortgage rate is lower than market rates, an assumable mortgage can be a great selling feature.
Blended Mortgage Payment: mortgage payments that go to paying back both the principal and interest. Blended payments are the standard type of mortgage payment.
Buyer Representation Agreement: an agreement between a buyer and realtor which gives the brokerage the authority to act on the buyer's behalf for a specified period of time. A Buyer Representation Agreement must be signed before a realtor presents an offer to a seller on a buyer’s behalf. The standard OREA Buyer Representation Agreement (useful annotated version found here) states that the buyer must inform the realtor of any property that they are interested in. If the buyer does not inform the realtor of a property which they are interested in and subsequently purchases the property, the buyer will still owe the salesperson the set commission.
Capital Gain: the profit when the sale of a capital asset (real estate, stocks, etc.) is more than the purchase price (and the expenses incurred to purchase it). The capital gain on a primary residence is not taxed in Canada.
Closing Date (Completion Date): the date that the buyer and seller expect to complete the transaction. Closing takes place after the parties are satisfied that all of the legal and financial obligations have been met. The closing date is typically between 30 to 60 days from the date that the Agreement of Purchase and Sale was signed.
Chattels: property that is not permanently attached to real property and therefore not considered part of the real property (in contrast to fixtures). The purchase of chattels in addition to the real property can be negotiated in the Agreement of Purchase and Sale, and may include such items as dishwasher, washer/dryer, stove, electric garage door openers, etc.
Compound Interest: when interest is compounded, interest is added to the amount owing before subsequent calculations are made. The result is that a borrower is paying interest on the interest that the lender is owed. In Ontario, the Mortgage Act specifies that interest on a mortgage cannot be compounded more frequently than on a semiannual basis (6 months).
Condominium Lien: According to real estate law in Ontario, if an owner defaults in their obligation to contribute to the common expenses, the condominium corporation has a lien against the owner’s unit and his/her common interest for the unpaid amount, interest and reasonable legal and other expenses incurred by the corporation in collecting the unpaid amount.
Condominium Reserve Fund: a reserve fund that a condominium must maintain to pay for major repairs on condominium infrastructure, such as plumbing, underground garages, roofing, etc. By law, at least 10% of the monthly maintenance fees must go to the reserve fund.
Conventional Mortgage: the conventional mortgage is the most common type of mortgage. In a conventional mortgage, the borrower would provide a down payment of 25% of the appraised property value or purchase price (whichever is lower). The mortgage would typically be for the remaining 75% of the value/purchase price. Conventional mortgages are in contrast to the high-ratio mortgage. A conventional mortgage allows the borrower to pay 20% or more of the value/purchase price as a down payment.
Convertible Mortgage: Convertible mortgages are fixed-rate mortgages for terms of 6 months to 1 year. During the term, the borrower is free to convert their mortgage to a longer closed term, such as 5 or 10 years, without penalty, but only with the same lender. If the borrower does not opt to convert, the mortgage becomes fully open at the end of the current term and the borrower may renew with the lender or transfer to another lender. The terms of a convertible mortgage may differ quite a bit between financial institutions.
Gross Debt-Service Ratio (GDS): Lenders use the gross debt-service ratio to approve or deny a borrower for a mortgage. The GDS ratio is used to determine whether a borrower can afford to take on a mortgage. The GDS ratio is the percentage of a borrower’s total (gross) income that can be used to pay housing costs (including mortgage, taxes, heating, utilities, condominium fees, etc.). Usually, a gross debt-service ratio will be about 30 to 35%, which means that a lender will want to ensure that only about 30% to 35% of a borrower’s monthly income will be applied to housing (this ensures that they have additional money for other living expenses, such as car payments, entertainment, food, etc.). This also means that a borrower will not approve a borrower for a particular mortgage if their total housing costs are more than 30 to 35% of their total income. For example, if a borrower has a gross annual income of $80,000 (or $6,667 per month), then a bank will only approve them for a mortgage if their housing costs (mortgage payments, taxes, utilities, etc.) are $2000 per month or less (which works out to a 30% GDS ratio in this example). See also “Total Debt Service (TDS) ratio”.
Declaration: the Declaration is the governing document of the condominium corporation. Every condominium in Ontario is required to have a Declaration. It sets out the most important rules, including the percentage of the common expenses that each unit owner pays, percentage of common interest each owner has, whether there are any exclusive use common elements and the obligations of unit owners for repairs and insurance.
Document Registration Agreement: an agreement between the lawyers of the buyer and seller about timing of the closing. It usually specifies that the transfer of funds and registration of title will not take place at the same time.
Encroachment: an unauthorized intrusion onto another person’s property. For example, if a neighbouring property owner built a fence, retaining wall or shed that sticks out onto another property, this would be considered an encroachment. Encroachments can be identified by having a survey prepared.
Equity: in the context of real estate, equity is the difference between the amount that a property could fetch on the open market and the balance owing on a mortgage. For example, if a home could be sold for $300,000 and only $100,000 remains on the mortgage, the buyer would have $200,000 of equity in the home. As a borrower makes mortgage payments, his or her equity in the home increases. Equity can also increase if the value of the property appreciates.
Fixtures: physical property that is permanently attached or fixed to real property (in contrast to chattels).
High-Ratio Mortgage: in contrast to a conventional mortgage, in which the borrower pays 25% of the purchase price or property value as a down payment, a high-ratio mortgage allows the borrower to borrow 95% of the purchase price or property value and make only a 5% down payment. High-ratio mortgages are useful when a borrower does not have the funds necessary to make a 25% down payment, as can be the case for a first-time homebuyer. The law requires that borrowers obtain mortgage insurance for high-ratio mortgages (any mortgage where the down payment is less than 20% of the price). Mortgage loan insurance protects the lender in the event that the borrower defaults.
Irrevocable Date: when an offer is made to purchase a property, the offer is irrevocable (cannot be withdrawn) for a specified period time. The offer must remain open until the irrevocable date, which is the point at which the offer expires. The buyer usually determines how long the offer stays open (specifies the irrevocable date). The seller can either accept the offer, reject it, or make a counter-offer (also know as “signing back”).
Joint Tenancy: a form of ownership in which two or more people own a property in equal proportions. In a joint tenancy, when one of the joint tenants dies, their interest goes to the surviving joint tenants. This is in contrast to a tenancy in common (see definition below).
Land Transfer Tax (Ontario): the land transfer tax rate is graduated so that a buyer pays a greater proportion of tax for a more expensive home. Currently, the land transfer tax rates are as follows: The first $55,000 is taxed at 0.5%. Anything between $55,00.01 and $250,000 is taxed at 1.0%. Anything between $250,000.01 and $400,000 is taxed at 1.5%. Anything over $400,000 is taxed at 2%.
Land Transfer Tax (Toronto): if the property being purchased is located in Toronto, the buyer will have to pay the Municipal Land Transfer Tax (MLTT) on the transaction in addition to provincial Land Transfer Tax. The value of the tax is as follows for most residential properties: The first $55,000 is taxed at 0.5%, then anything between $55,000.01 and $400,000 is taxed at 1.0%. Finally, anything over $400,000 is taxed at 2.0%. This means that if a buyer purchased a home in Toronto for $500,000.01, they would pay $5,725 in MLTT ($275 + $3,450 + $2,000). Note that there is a rebate of up to $3,725 for first-time purchasers. This means that a first-time purchaser will get a full rebate where they purchase a home for $400,000 or less.
Mortgage Refinancing: occurs when a borrower with an existing mortgage obtains a new mortgage or debt obligation under different terms. Refinancing can be advantageous when interest rates are low, when a borrower wants to bring high interest debt (credit card debt) under a mortgage or to consolidate a number of separate debts. It may be harmful if a borrower would face expensive penalties for repaying the existing mortgage outside of the payment schedule.
Mortgage Disability Insurance: a form of insurance that pays off your mortgage in the event of disability or illness.
Mortgage Life Insurance: a form of insurance that pays off your mortgage in the event of death. This ensures that the unpaid balance of a borrower’s mortgage is not a burden on his/her estate. Some insurance companies allow a mortgage life insurance policy to be triggered when a policyholder is diagnosed with a terminal illness.
Mortgage Loan Insurance: provides protection in the event that a borrower defaults on their mortgage. Mortgage loan insurance is required by law for high-ratio mortgages (mortgages in which the borrower makes a down payment of less than 20% of the purchase price or property value (whichever is less). The premiums for mortgage loan insurance are paid by the lender (bank) and are typically passed on to the borrower in the form of a higher interest rate.
New Home Warranty: all home builders in Ontario must be registered under the TARION Warranty Corporation. The houses that they build must meet the specifications of the program.
Portable Mortgage: if a borrower sells their property, a portable mortgage allows him or her to take the mortgage with them in order to purchase another property. Non-portable mortgages may allow this as well, but are usually accompanied by a penalty charge. A portable mortgage can be advantageous if the current mortgage rates are higher than the borrower’s existing mortgage rate.
Planning Act: Legislation in Ontario which regulates the development of land. Clause 15 in the Standard OREA Agreement of Purchase and Sale creates a condition in which the seller must comply with the subdivision control provisions of the Planning Act.
Requisition: when the buyer’s lawyer performs searches of title, a requisition identifies a specific deficiency with the property and outlines a resolution to the problem. Requisitions must be presented to the seller by the requisition date. If the seller is unable to answer the requisition, the buyer may be able to repudiate (withdraw) from the deal, or close and claim a reduction in the purchase price.
RRSP Homebuyers’ Plan: a government program that allows prospective homeowners to withdraw up to $20,000 from their RRSP in order to buy or build a home. Under the program, a qualifying withdrawal is not taxed or included as income. To qualify, the buyers must be first-time home-buyers and the home must be their principal residence. If the purchase is being made by spouses, each may withdraw $20,000 from their RRSP under the program. Additional information can be found here.
Second Mortgage: a mortgage that is taken out after an existing mortgage. Second and third mortgages are usually available at higher interest rates over shorter periods of time. Borrowers wishing to obtain second and third mortgages must still be approved by a lender.
Statement of Adjustments: document setting out all of the adjustments and proposing how they will be dealt with.
Status Certificate: a document that discloses a condominium corporation’s ability to meet its future liabilities. The status certificate must disclose the existence of service contracts, overdue payments, insurance policies, information regarding the corporation’s reserve fund, pending legal actions against the corporation, etc. The corporation must provide a copy of the certificate to anyone who makes a written request and pays the applicable fee (which must be under $100, including tax). When bidding on a condominium, a buyer’s offer can be conditional upon him/her reviewing the status certificate (among other documents) and concluding that the information contained in it is satisfactory. Although buyers may feel pressured into making an unconditional offer, it is always best to have the status certificate reviewed by a lawyer. Rohoman & Mohammed LLP is pleased to offer a complimentary review of clients’ Status Certificates prior to their closing.
Survey: the survey is a legal document that describes a property, including its dimensions. Surveys include a sketch of the property showing neighbouring boundary lines and any fixtures on the property, such as fences. Surveys must be prepared by a licensed Ontario Land Surveyor. For more information, please visit The Association of Ontario Land Surveyors.
Tenancy in Common: a tenancy in common is a form of ownership in which a property is owned by more than one person, with each person owning a particular share (or interest) in the property. Each owner's interest is usually described as a percentage. Each owner has the right to use the property in common with the other owners and each owner may also sell their interest to another. When one of the tenants in common dies, their interest passes according to their Will.
Title Fraud: there are various forms of title fraud, but a common scenario involves a person using an alternative identity and forged documents in order to pose as the owner of a property. The fraudster then attempts to deceive a bank and obtain a mortgage. After obtaining the mortgage funds, the culprit disappears.
Title Insurance: Insurance that protects the buyer (and lender) against unknown defects in title or zoning. For example, undiscovered liens, encroachments, or errors in the survey or municipal records. It also protects against title fraud. It typically does not cover aboriginal land claims, environmental contamination, matters not listed in public records and zoning violations that can be attributed to the policy-holder (i.e. the policy-holder had the previous owner install an extension, in violation of zoning bylaws). Title insurance is not required in Ontario, but is usually a good investment. Title insurance is typically valid for as long as you own the property and is purchased by paying a one-time premium.
Total Debt Service (TDS) Ratio: a calculation used by lenders to ensure that a borrower is not taking on too much debt. The TDS allows a lender to ensure that a borrower can afford housing expenses (mortgage payments, taxes, utilities, condominium fees, etc.) and other fixed debt, such as student loans, car payments, lines of credit, credit card debt, etc. Typically, a lender will not want these fixed payments to exceed 40% of the borrower's monthly income. For example, if a borrower has a gross annual income of $80,000 (or $6,667 per month), then a bank will only approve them for a mortgage if their housing costs (mortgage payments, taxes, utilities, etc.) and other fixed-debt commitments are $2,667 per month or less (which works out to a 40% TDS ratio in this example).
Variable-Rate Mortgage: in contrast to fixed-rate mortgages, in which the interest rate is fixed for the mortgage term (typically 5 years), a variable rate mortgage is one in which the interest rate floats in relation to market interest rates. In most cases, a borrower’s monthly payments under a variable-rate mortgage will be the same month-to-month. However, the portion of each payment that goes towards interest will depend on market rates. This means, for example, that if interest rates increase, more of the borrower’s payment is applied to interest and less is applied to the principal. Conversely, if rates go down more of the borrower’s payment is applied to the principal and less to interest. Variable-rate mortgages can be advantageous when a borrower takes out a mortgage while interest rates are high because it ensures that the borrower is not stuck at a high interest rate when market rates fall.
Vendor Take-Back Mortgage (also called a seller take-back mortgage): an arrangement in which the seller provides financing for the buyer of a property. Instead of obtaining a mortgage from a financial institution, the buyer pays the purchase price to the seller in instalments over a given period of time. The title is typically transferred to the buyer from the outset. The advice of a real estate lawyer is recommended if contemplating a vendor take-back mortgage. Vendor take-back mortgages are popular when the housing market is slow or a seller is looking for a quick sale. It allows buyers to begin living in a home before having to save a large down-payment to an institutional lender.