The process of buying a home is easier when you understand what it all means. These clear definitions of common mortgage terms will help you learn the lingo.
The amortization period is the length of time it will take you to pay off your entire mortgage at your current interest rate and payment. Your amortization period will change over time as you renew at different interest rates, with different payment amounts.
The APR is the effective, or total, interest rate you pay on your mortgage. It takes into account both the advertised interest rate and any fee you need to pay to set up the mortgage. The APR helps you compare two different mortgages that may have similar interest rates, but different fees. For example, Lender A may advertise a lower interest rate than Lender B. But when fees are included, the total cost (APR) for Lender A may actually be higher. When comparing rates, it’s always best to compare APRs.
An appraisal is an independent evaluation to determine a property’s value. Your lender may ask for an appraisal before approving your mortgage to ensure the loan truly represents the property’s value.
An appraisal fee is charged by an expert to estimate the current value of a property. This fee is usually paid by the homebuyer.
An appraised value is the estimate of the current value of a property. The value is generally determined by sale prices of similar properties in the same area and does not include a home inspection. The appraised value of the property may or may not be the same as the purchase price.
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.
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.
The FCAC monitors activity to make sure banks follow federal rules and regulations. It also provides Canadians with information relating to their rights and responsibilities as clients of a financial institution.
The first mortgage that is registered against a property is what secures the mortgage. A first mortgage has priority over all other claims on the property in the event of sale or default.
A fixed rate is a predetermined, guaranteed interest rate that does not change throughout the term of the mortgage.
A fixed rate mortgage has a predetermined, guaranteed interest rate that does not change throughout the term of the mortgage. A closed term mortgage cannot be prepaid beyond a lender’s prepayment privileges, renegotiated or refinanced without incurring a prepayment charge. Interest rates for closed term mortgages are generally lower than those for open term mortgages offering you the ability to save on interest costs.
A fixed rate mortgage has a predetermined, guaranteed interest rate that does not change throughout the term of the mortgage. An open term mortgage can be partially or fully prepaid at any time without prepayment charges. Interest rates for open term mortgages are generally higher than those for closed term mortgages because of the pre-payment flexibility.
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.
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.
land transfer tax is a one-time fee charged when you take ownership of a property. The amount of tax is usually based on the purchase price of your home.
Legal fees are payment for the services of a lawyer or notary during the purchase process.
The LTV ratio is the amount of your mortgage loan compared to the purchase price of your property. As an example, if the purchase price of your home is $200,000 and you have $40,000 for the down payment, your mortgage will be $160,000 and your LTV ratio will be 80% ($160,000/$200,000).
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.
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:
- You can increase your regular payment amount
- 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.
To refinance means to renegotiate your current mortgage loan amount, conditions and interest rate before the end of the current term.
To renew means to renegotiate your current mortgage interest rate and conditions of your mortgage loan after your mortgage term ends. If you don’t renew your mortgage at the end of the term, you’ll need to repay the mortgage balance in full.
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.
A variable interest rate will change when your lender’s prime lending rate changes. While your mortgage payment may not change, how your payment is allocated will change. If rates go down, more of your payment will go towards the loan principal so you’ll pay off the mortgage faster. If rates go up, more of your payment will go towards interest costs, which means it may take longer to pay off your mortgage.