Understanding common mortgage terms

Blended rate is a term that typically applies when you’re changing your mortgage. It’s a combination of the interest rate for your previous mortgage and the interest rate for your new mortgage.

Bridge financing is a short-term loan that a lender provides when you need to purchase a new property before you receive the money from the sale of your current property. You then pay back this loan when your current property closes. The cost of bridge financing varies – in addition to the mortgage payment and interest cost, there may also be a set-up fee.

Canada Guaranty is one of three companies in Canada that offer mortgage insurance for high-ratio mortgages – that is, mortgages greater than 80% of the purchase price of the property. In Canada, you are required to insure your mortgage if your down payment is less than 20% of the purchase price of the property. This protects the lender against loss if you fail to make your mortgage payments. The other two companies are the Canada Mortgage and Housing Corporation (CMHC) and Sagen.

CMHC is one of three companies in Canada that offer mortgage insurance for high-ratio mortgages – that is, mortgages greater than 80% of the purchase price of the property. In Canada, you are required to insure your mortgage if your down payment is less than 20% of the purchase price of the property. This protects the lender against loss if you fail to make your mortgage payments. The other two companies are Canada Guaranty and Sagen.

The CMHC insurance premium is the amount added to your mortgage payment to cover CMHC mortgage insurance for high-ratio mortgages –that is, mortgages greater than 80% of the purchase price of the property.

A closed-term mortgage commits you to an interest rate, a lender and any conditions for a specific amount of time. With a closed-term mortgage, you can’t repay the full mortgage balance earlier than scheduled without incurring a penalty.

Closing costs are one-time expenses you have to pay when you buy a home. They include legal fees, appraisal fees, title insurance and land transfer taxes. As a general rule, you should plan to save 4% of the purchase price of your home for closing costs.

Your closing date is the date on which you formally take possession of your home. It’s agreed upon by you and the seller when negotiating the offer to purchase. This is usually the day that you meet with the lawyer to sign paperwork, pay the closing costs and get the keys to your new home. On the closing date, the buyer now has the title to the property and the mortgage takes effect.

A conventional mortgage is simply a mortgage for which you’ve provided a down payment of 20% or more.

A convertible mortgage gives you the same benefits as a closed-term mortgage, but also gives you the option to change to a longer, closed term at any time, without a penalty. 

This is an optional life insurance policy you can choose to purchase when you get your mortgage. It repays some or all of your mortgage debt in the event of death. Mortgage disability and job loss insurance are also available.

A credit bureau is an organization that keeps track of your borrowing history and provides your credit report and credit score to lenders upon request. The information provided by a credit bureau will help a lender decide whether to lend to you, and at what interest rate. Equifax Canada and TransUnion Canada are the two Canadian credit bureaus.

A credit report is a record of your debt payment history, your current debts and the amount of credit you currently have access to. Credit reports are provided by one of Canada’s two credit bureaus Equifax Canada and TransUnion Canada.

Your credit score is a numerical rating from 300 to 900 that estimates your ability to repay debts, based on factors such as your debt repayment history, your current debts and the amount of credit you currently have access to. The higher your credit score, the more likely you are to be approved for a loan.

Your daily closing balance is the balance owing on your mortgage at the end of the current business day.

A borrower is considered to be in default when he or she fails to fulfil the requirements of a loan. This could include failing to make mortgage payments on time, failing to have adequate homeowner’s insurance in place or not paying property taxes.

A mortgage is discharged when the balance has been paid in full and the mortgage contract has been cancelled. The fee to discharge your mortgage varies among lenders and provinces.

A down payment is the amount of money you put towards the purchase of a home. The mortgage amount is the difference between the purchase price and your down payment. For example, if you purchase a home for $500,000 and your down payment is $100,000, your mortgage amount will be $400,000.

Equifax Canada is one of Canada’s two credit bureaus. Credit bureaus keep track of your borrowing history and provide your credit report and credit score to lenders upon request. You can contact Equifax Canada to get your credit report and credit score.

Your equity is the value of your home, less any mortgage debt. If the value of your home is $300,000 and you have a mortgage of $100,000, your equity is $200,000.

Sagen is one of three companies in Canada that offer mortgage insurance for high-ratio mortgages – that is, mortgages greater than 80% of the purchase price of the property. In Canada, you are required to insure your mortgage if your down payment is less than 20% of the purchase price of the property. This protects the lender against loss if you fail to make your mortgage payments. The other two companies are Canada Guaranty and the Canada Mortgage and Housing Corporation (CMHC).

GDS ratio is the percentage of your income that’s needed to cover housing-related expenses, such as utilities. Lenders use this ratio to help determine the amount of mortgage you can afford. The maximum GDS is usually 32%.

A high-ratio mortgage is simply a mortgage for which your down payment is less than 20%. With this type of mortgage, you’ll need to purchase mortgage insurance.

The HBP is a program offered by the federal government that allows you to withdraw up to $60,000 from your Registered Retirement Savings Plan (RRSP) tax-free towards the purchase of a home. Please visit the Canada Revenue Agency website for more details.

A HELOC lets you use the equity in your home as security for a credit line, usually at a lower interest rate than a traditional mortgage. It is revolving credit, which means you can borrow the money, pay it back and borrow it again, up to your maximum borrowing limit.

Your interest rate is the percentage of your outstanding loan that a lender charges you each year in exchange for providing you with the loan. As a simple example, if you borrow $100,000 and your lender charges you $5,000 per year in interest, your interest rate is 5%. See our current mortgage interest rates.

An interest rate differential is a penalty that may apply if you prepay more of your mortgage principal than your prepayment privileges permit. It is the difference between your mortgage rate and the rate of a mortgage that is closest to the remainder of your term, multiplied by the outstanding balance of your mortgage for the time that is left on your term. It is calculated on the amount of principal being prepaid.

An interest rate guarantee is offered when a lender agrees to “hold” a specific interest rate for you for a certain period of time. If rates go up during that period, you’re guaranteed to get the original lower rate. If rates go down, you get the new lower rate.

The maturity date is the day on which your current mortgage term ends. On this date you’ll need to renew your mortgage or pay off the loan balance in full.

A mortgage is a loan used to purchase or refinance a home. The property is used as security for repayment of the loan.

If you have a down payment of less than 20%, you will need to purchase mortgage insurance. Offered by Canada Guaranty, the Canada Mortgage and Housing Corporation (CMHC) or Sagen, mortgage insurance protects the lender against loss if you fail to make your mortgage payments. In some instances, mortgage insurance is required even if the down payment is 20% or more. 

Your mortgage term is the time period your mortgage conditions are in effect. These conditions include the interest rate and payment schedule. Mortgage terms are usually between 6 months and 10 years, with 5 years being the most common term.

A mortgagee is the lender who advances funds to the borrower for the mortgage. The borrower’s property secures repayment of the mortgage.

 A mortgagor is the borrower who uses his or her property as security for the mortgage provided by the lender.

An offer to purchase is your proposal to the seller with the terms and conditions for the purchase of your new home. It’s usually prepared by a real estate agent, but may also be prepared by a notary or lawyer.

An open term mortgage allows you to pay back all the money you borrow at any time, without any penalty. Because of this flexibility, open term mortgages generally have higher interest rates.

Payment frequency refers to how often you’re required to make mortgage payments. Common payment frequencies are bi-weekly and semi-monthly.  Manulife Bank offers six payment options.

Porting a mortgage means that, when you move, your mortgage moves with you. When you port your mortgage, you don’t have to pay discharge fees or prepayment penalties.

A pre-approval is a commitment that a lender makes to provide you with a mortgage in the future.  It outlines how much the lender is willing to lend you and what your estimated payments will be. It also locks in the current interest rate for a period of time so you’re protected in case rates go up.

A prepayment penalty is the fee you’re charged for repaying more of your mortgage than is allowed in your mortgage contract, before the maturity date. This only applies to closed term mortgages.

A prepayment privilege is a condition within your mortgage contract that allows you to pay more than your regular mortgage payment without penalty. Closed term mortgages typically allow limited prepayments in two ways:

1. You can increase your regular payment amount
2. You can make extra payments

Any extra payments you make reduce your mortgage balance and help pay down your mortgage faster. 

The prime interest rate is a rate set by the Bank of Canada and referenced by lenders when setting their own rates. Variable rate mortgages and lines of credit (such as a home equity line of credit or HELOC) are usually offered to clients as a percentage above or below prime - for example prime +2%.

Your loan principal is your mortgage loan amount. Your mortgage payment is made of two portions. One part goes to reduce your principal, and the other part goes toward paying your interest cost.

Homeowners pay taxes to their municipality or town for local services such as hospitals, schools and garbage collection.  Property taxes are calculated based on the location and size of your property as well as the value of your home.

A second mortgage is a mortgage on a property that already has an existing mortgage. A second mortgage often has a shorter term and higher interest rate than a first mortgage.

Security is any property held as collateral for a loan. In the case of your mortgage, your home is the security.  Security is used to guarantee approval of the loan. It will be used to pay off the mortgage if you fail to make payments or declare bankruptcy.

Having title on a property means you legally own it.

Title insurance is optional insurance that protects you if someone challenges the ownership of your property.

A title search occurs when a lender reviews ownership records to ensure the seller of a property is actually the owner. It also confirms that the current owner has the right to sell the property.

The TDS ratio is the percentage of your income that is needed for debt payments. Lenders use this ratio to help determine whether to offer you a mortgage. It’s recommended that your TDS ratio be a maximum of 40%.

TransUnion Canada is one of Canada’s two credit bureaus. Credit bureaus keep track of your borrowing history and provide your credit report and credit score to lenders upon request. You can contact TransUnion Canada to get your credit report and credit score.

A trigger interest rate is the interest rate at which your regular payment is no longer sufficient to pay the required interest. Your lender may automatically increase your regular payment at that time to incorporate the increased interest amount.

Underwriting refers to the review process a lender goes through when determining whether to approve a loan.