GLOSSARY    P

P & I / PIT / PITH

These initials stand for Principal & Interest   /   Principal, Interest & Taxes   /   Principal, Interest, Taxes & Heating.

PAYMENT - INTEREST ONLY

A few mortgages are interest only. These are usually lines of credit secured by a collateral mortgage. The interest rates are often 'floating' - in other words they will increase or decrease with the lender's prime rate (e.g. Prime plus 1%).

Interest is calculated on the outstanding daily balance of the mortgage. The total monthly interest amount is debited to your account. You decide when, and by how much, to pay down the principal owing. The longer you take, the more interest you pay.

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PAYMENT - PRINCIPAL & INTEREST

The majority of mortgage funds borrowed to purchase property are repaid with monthly payments. Each payment is made up of interest and a portion of the principal. The amount of interest paid is calculated on the balance owing, so each successive payment consists of a smaller amount of interest and a greater amount of principal.

For example:

If you take a mortgage of $150,000 with a 25 year amortization, and a 5 year term at 8%, your payments will be $1,144.82 per month.
In the first month of your mortgage, that amount will consist of $161.09 as a principal payment and $983.73 in interest.

After 30 months the same payment will consist of $194.71 as a principal payment and $950.11 in interest.
After 60 months (5 years), the same payment will consist of $236.90 as a principal payment and $907.92 in interest.

Most mortgage payments are made 'not in advance.' This means mortgage payments are made at the end of a time period. For example a monthly payment on June 1st actually pays for the previous month of May. This is the opposite of rent, June 1st rent payment covers the upcoming month of June.

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PAYMENT IN FULL

If a lending institution requests 'payment in full,' they want you to pay them the principal and interest owing to them on a specific date.

Sometimes this term is used when your mortgage is up for renewal. In this case don't panic! Lending institutions usually just want to hear from you, what your intention is... will you renew with them - or are you arranging financing with another institution? This is a good time to talk to your mortgage broker!

If you have a private mortgage, you will usually have to arrange other financing at maturity (the end of the term). A mortgage broker will help arrange alternate financing for you.

PERSONAL COVENANT

When funds are borrowed in the name of a company, the owners or directors will usually be asked for their 'personal covenant.' If the company defaults on the mortgage, the lender has the right to sue the individuals who have given their covenant (or guarantee).

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POSTED RATES

When you walk into any branch of a financial institution you will usually see a bunch of numbers stuck onto a board. This will be their 'posted' interest rates.

The financial institutions advertise their 'posted rates' - usually both lending and deposit rates. These are the interest rates that appear in the newspapers and on their web sites. Even if you phone your local branch, these will usually be the rates you are quoted.

Most lenders will 'discount' (reduce) the quoted rates - if you ask them to!
Generally the lenders will reduce the mortgage rates by one-half or three-quarters of one percent. If you apply for a mortgage (or switch your present mortgage) with your mortgage broker you will often obtain a one percent reduction, though this may not always be with your current financial institution.

PREPAYMENT CLAUSE

This clause or section of the mortgage contract describes whether you are allowed to pay off all, or part, of your mortgage (over and above your normal payments) prior to the maturity date.

This section should also plainly state if there are any penalties for paying extra and how the penalties are calculated. Pay very close attention to these details - how a penalty is calculated can make a huge dollar difference.

Not all institutions allow you to pay off a mortgage prior to maturity, even with a penalty.

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PRIME RATE

Each financial institution sets its own prime rate, and they are usually all the same. This rate is based on the Bank of Canada's prime interest rate - if the Bank of Canada increases its rate the banks are sure to follow!

Previously, only the very wealthy (or big businesses) could borrow at prime. Now variable rate mortgages at 'prime minus' are available to anyone.

PRINCIPAL

The amount of money borrowed, or the amount outstanding at any point of time.

PRIVATE MORTGAGES

A private mortgagee (lender) is usually considered a 'lender of the last resort.'
The money lent to a borrower is usually from private sources - people who have lots of money to invest, and are willing to lend at high interest rates, secured by a mortgage on your property.

There are few reasons to borrow from a private lender. For example, a very poor credit rating or a lack of equity. The interest rates on private mortgages are very high - almost double bank rates. This reflects the extra risk involved with these loans.

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PRIVATE SALE / FOR SALE BY OWNER

Where the vendor chooses to sell property without a realtor. By doing this, the vendor hopes to save himself thousands of dollars in realtor fees. Private vendors choose to advertise their property themselves.

From the buyer's point of view, an independent appraisal will confirm whether the price is reasonable and a building inspection will indicate the soundness of the building. The purchaser will expect to pay a lower price than the appraised value as there are no realtor fees. It is very important in this situation for a lawyer to check all documentation prior to signing the contract of purchase and sale.

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PROPERTY TAXES

In some cases, the lender will insist on collecting an amount from you for the property taxes. This is frequently done for high ratio mortgages.

Property taxes pay for such local services as roads, garbage collection, snow removal, police, fire & ambulance etc...
Taxes are paid at least once a year - in some cases property taxes are broken down to smaller amounts and paid more frequently.

If you have home owner grants in your province (these are grants that allow you to pay less property taxes if the property is your primary residence), it is up to you to apply for the grant. The lending institution will pay the remaining balance due.

Your tax account may end up either overdrawn, or with a positive balance. Most institutions will recalculate the amount being collected from you to end up with an amount closer to your actual property tax bill.

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