Mortgage Basics

  • Mortgage Basics
  • Glossary of Mortgage Terms
Why Choose a Mortgage Broker?

Mortgage Broker:

A licensed mortgage specialist who has access to multiple lenders and mortgage rates. A mortgage broker can find the right mortgage product for you, negotiate a better rate on your behalf and pass on volume discounts to you.

Fixed vs. Variable

 A fixed interest rate  means your interest rate will not change throughout the term of your mortgage loan, and neither will the amount of your principal and interest payments. If you’re a first-time home buyer and are happiest knowing exactly what to budget for, a fixed rate mortgage is a wise choice. 

With a variable rate mortgage, the interest rate can fluctuate along with any changes in our Mortgage Prime Rate. Your principal and interest payments will stay the same for the term, but if the Mortgage Prime Rate goes down, more of your payment will go towards the principal. If the Mortgage Prime Rate goes up, more will go towards interest.

Rent vs. Buy

Should you rent or should you buy your home? It takes more than looking at your mortgage payment to answer this question. The first steps in buying a house are ensuring you can afford to place at least 5% of the purchase price of the home as a down payment and determining your budget. This calculator helps you weed through the fees, taxes and monthly payments to help you make a good financial decision.

What is CMHC?

Canada Mortgage and Housing Corporation (CMHC) – The Canada Mortgage and Housing Corporation is a mortgage default insurance provider. This insurance protects the mortgage lender against loss if a borrower defaults. This also means you could put as low as a 5% down payment or as high as a 15% down payment and CMHC will insure the rest for a premium.

What is LTV?

Loan-to-Value Ratio (LTV)- A term used to express the ratio of your mortgage loan compared to the value of the property. For example, if you borrow $300,000 to purchase a $350,000 home, your LTV ratio is $300,000 / $350,000 or 86%. To make up the full 100%, you would have to make a 14% (100% – 86%) down payment, which in this case would be $50,000. The higher your LTV ratio is, the riskier your loan is for the lender. 

What is GDS?

Gross Debt Service Ratio (GDS)- The debt service ratio calculation used to determine how much you can afford to pay each month to own a particular property. Your lender adds up your monthly mortgage payment, property taxes and utilities, and divides the total by your gross monthly income. If the answer equals less than 32 per cent (industry standard), your lender can feel confident in your ability to pay your monthly housing costs. The absolute maximum GDS allowed is 39%. 

What is TDS?

Total Debt Service Ratio (TDS) – The debt service ratio calculation used to determine how much you can afford to pay each month to own a property and fulfill your other debt commitments. Your lender adds up your monthly mortgage payment, property taxes, utilities and minimum debt repayments, and divides the total by your gross monthly income. If the answer equals less than 40 per cent (industry standard), your lender can feel confident in your ability to make all of your monthly payments. The maximum TDS allowed is 44%. 

A B C D E F G H I L M N O P R S T U V W

A 

Accelerated Bi-Weekly Mortgage Payment

When your monthly mortgage payment is divided by two and the amount is withdrawn from your bank account every two weeks. In total, you make 26 payments per year, but the payment amount is slightly higher than a regular bi-weekly mortgage payment. 

Accelerated Weekly Mortgage Payment

When your monthly mortgage payment is divided by four and the amount is withdrawn from your bank account every week. In total, you make 52 payments per year, but the payment amount is slightly higher than a regular weekly mortgage payment. 

Agreement of Purchase and Sale

The contract between the buyer and the seller of a home. The agreement of purchase and sale outlines the terms and conditions both the buyer and seller promise to abide by when the property is sold, including the purchase price, property features included in the price, closing date and more. 

Amortization

The length of time it takes you to pay off your mortgage in full. The maximum amortization period in Canada is 25 years for high-ratio mortgages (those that require CMHC insurance), and can go up to 35 years for conventional mortgages. 

Appraisal

The valuation of a property, used to determine the market value. There are a number of times you may choose to get a home appraisal, including: when you’re buying a home, selling a home, refinancing, taking out equity, and even when you’re appealing a property tax assessment. 

Assumable Mortgage

A mortgage that can be transferred from the seller to the buyer. When assuming a mortgage, the buyer also needs to pay the seller the difference between their purchase price and what’s leftover on the mortgage. 

B

Bad Credit Mortgage

A home loan option made for individuals with bad credit (scores below 700) who have been turned down by the major banks. The two most popular bad credit mortgage providers are trust companies and private lenders. 

Bank of Canada

Canada’s central bank. The Bank of Canada was founded in 1934 and became a Crown Corporation in 1938. It serves to promote the economic and financial well-being of Canada, and is responsible for setting the overnight lending rate and determining monetary policy. 

Basis Point

A unit of measure for 1/100th of a percent (0.01%). For example, if you heard that interest rates increased by 30 basis points, it means they went up by 0.30%. 

Bi-Weekly Mortgage Payment

When your monthly mortgage payment is multiplied by 12 months and divided by the 26 pay periods in a year. The amount is withdrawn from your bank account every two weeks, so you make 26 payments per year. 

Blended Mortgage

When you combine the mortgage rate from an existing mortgage with the mortgage rate from a new mortgage and blend them into a new rate somewhere in-between the two. You would get a blended mortgage to avoid breaking your mortgage early – to access equity and/or obtain a lower mortgage rate – and having to pay the prepayment penalty required to do so. 

Blended Payments 

Mortgage payments that include both a principal (the amount borrowed) and an interest component, paid on a regular basis (e.g. weekly, bi-weekly, monthly). Over time, the amount of principal paid increases, while the amount of interest paid decreases, with the total regular payment usually not changing.

Bridge Financing

A short-term loan, typically taken out for a period of 2 weeks to 3 years pending the arrangement of larger or longer-term financing. You would need bridge financing if you were stuck in a situation where the closing date for the home you’re purchasing is before the closing date of the home you’re selling, leaving you without a down payment for the new home because it’s tied up in equity. 

C

Carrying Costs (or Monthly Carrying Costs)

The extra costs you have to pay each month as a homeowner, over and above your mortgage payment. Common carrying costs are: property taxes, condo fees, home insurance, utilities and telecommunication services. 

Cash Back Mortgage

A mortgage product that allows you to take out an additional lump sum of cash on closing day – typically between 1 and 7% of the principal amount you are borrowing. Cash back mortgages always come with fixed interest rates, so lenders can compensate for the additional money paid out upfront. 

Certificate of Search or Abstract of Title 

A document showing all existing claims to a property, like a deed, mortgages, etc.

Closed Mortgage

A mortgage that cannot be prepaid (by more than the limit set in the terms and conditions), negotiated or refinanced throughout the mortgage term, without the borrower having to pay a hefty prepayment penalty. Closed mortgage rates can be fixed or variable, and are lower than open mortgage rates. 

Closing Costs

The legal and administrative costs associated with any real estate transaction. Whether you’re buying, selling or refinancing, your closing costs may include any of the following: a home inspection, deposit, down payment, land transfer tax, title insurance, legal fees, GST/HST, any prepaid property taxes or utilities, a prepayment penalty and more. 

Closing Date

The date of a real estate transaction, typically set to occur several weeks after an Offer to Purchase is accepted. On closing day, real estate lawyers ensure funds are moved so the seller is paid and the buyer’s mortgage is taken out. As well, all closing costs are paid, ownership of the property is transferred and the buyer can pick up the keys to their new home. 

Collateral Mortgage

A readvanceable mortgage product that allows your lender to lend you more money as your property value increases, without having to refinance your mortgage. One important thing to consider about collateral mortgages, however, is they cannot be transferred to another lender – not even at the end of your mortgage term. 

Conditional Offer 

An offer to purchase a property as long as certain conditions (like a home inspection, you obtaining financing from your bank, selling your existing home) are met. Usually there is a time limit in which the specified conditions must be met.

Conventional Mortgage

A mortgage that does not exceed 80% of the purchase price or value of the home, whichever is lower. Mortgages that exceed this limit must be insured against default (by CMHC or Genworth), and are referred to as high-ratio mortgages.

Convertible Mortgage

A mortgage that allows you to change the type of mortgage you have – either between fixed and variable rates, or from a shorter term to a longer term – before your term is up, without penalty. It’s important to note that not all lenders offer convertible mortgages. 

Credit Score

A number between 300 and 900 that is used by lenders to determine whether or not you can afford to repay any money they potentially lend you. The higher your number is, the better your chances are of being able to borrow money – and at a low interest rate. 

D

Debt Service Ratios

Two calculations lenders use to determine how much you can afford to borrow to purchase a home. Your gross debt service ratio (GDS) takes your monthly carrying costs into consideration and your total debt service ratio (TDS) includes all of your current debt commitments. 

Default

When you fail to make your monthly mortgage payments, you can eventually default on the loan, which means you failed to meet the legal obligations in your mortgage contract. 

Deposit

When you write up an Offer to Purchase with your real estate agent, they will request a deposit on the seller’s behalf. A deposit, which is typically 1% of the purchase price, proves to the seller that you are serious about buying their home. 

Down Payment

The amount of money you pay upfront when purchasing a home. In Canada, the minimum down payment you can make is 5% of the purchase price. A down payment of less than 20% leaves you with a high-ratio mortgage – one that legally requires mortgage default insurance (or CMHC insurance). A down payment of 20% or more leaves you with a conventional mortgage. 

E

Early Mortgage Renewal

If you still have an outstanding balance on your mortgage at the end of your term, you have to renew for another term. Most lenders allow you to renew and stay with them anytime in the final 120 days of your current mortgage term; this is known as an early mortgage renewal. 

Equity

The difference between the price for which a home could be sold (market value) and the total debts registered against it.

F 

Firm Offer

An offer to buy a property with no conditions attached.

First Mortgage

The mortgage in first position on the property that was used to secure your mortgage loan. If you ever defaulted on your loan, the lender in first position would be repaid before any other lenders you had used your home as security in order to borrow money from. 

First-Time Home Buyers’ Tax Credit (HBTC)

A $750 rebate for qualifying first-time homebuyers in Canada. To receive your $750 rebate, you must claim it with your personal income tax return under line 369. 

Fixed Mortgage Rate

A mortgage rate that stays the same for the duration of a mortgage term. For example, if you agree to a 5-year fixed rate at 2.89%, your mortgage rate – and mortgage payment amount – will stay the same for those 5 years. Fixed mortgage rates are the most popular type, representing 66% of all mortgages in Canada. 

G

Genworth Financial Canada (Genworth) 

Genworth Financial Canada a mortgage default insurance provider. This insurance protects the mortgage lender against loss if a borrower defaults.

Gross Debt Service Ratio (GDS)

The debt service ratio calculation used to determine how much you can afford to pay each month to own a particular property. Your lender adds up your monthly mortgage payment, property taxes and utilities, and divides the total by your gross monthly income. If the answer equals less than 32 per cent (industry standard), your lender can feel confident in your ability to pay your monthly housing costs. The absolute maximum GDS allowed is 39%. 

Gross Income

An individual’s total personal income before taxes and deductions. 

GST/HST (on a New Home Purchase)

If you buy or build a brand-new home, you will have to pay GST or HST on the purchase price, depending on which province you live in. 

H

High-Ratio Mortgage

A mortgage taken out by a buyer who has put down less than 20% of the purchase price. In order to take out a high-ratio mortgage, you have to purchase mortgage default insurance (or CMHC insurance), to protect the lender in the event that you ever default on your loan. 

Home Buyers’ Plan (HBP)

The Canadian government’s Home Buyers’ Plan (HBP) allows you to borrow up to $25,000 from your RRSP, tax-free, to help you purchase a home. Note that this is considered a loan and you must repay it within 15 years. 

Home Equity

The value of ownership you have built up in your home. To determine how much equity is in your home, take the current market value and subtract the balance of your mortgage loan. 

Home Equity Line of Credit (HELOC)

A home equity line of credit (HELOC) is a revolving line of credit secured by your home that offers a lower interest rate than a traditional line of credit. Through a HELOC, you can borrow up to 65% of the value of your home minus the outstanding balance of your mortgage. Note, however, that your mortgage balance + HELOC cannot equal more than 80% of the value of your home (meaning you must maintain 20% equity at all times). 

Home Inspection

A visual inspection of both the interior and exterior of your home. The report that follows will tell you whether or not everything is up to code, as well as when certain features of your home may need to be fixed or replaced. Most buyers include the successful completion of a home inspection as one condition in their Offer to Purchase. 

Holdback 

An amount of money withheld during the construction or renovation of a home to ensure contractors are paid.

I

Inspection 

The examination of the house by a building inspector selected by the buyer.

Interest

Typically expressed as an annual percentage rate, interest is the charge you have to pay in order to borrow money. 

Interest Adjustment Date

The date by which you must pay your interest adjustment, which is any interest accrued between your closing date and the date your first scheduled mortgage payment comes out. 

Interest Rate Differential Amount (IRD) 

A charge you may pay on your closed mortgage if you pay off your mortgage principal prior to the maturity date or pay the mortgage principal down beyond the prepayment privilege amount. The interest rate differential amount is the difference between the principal amount you owe at the time of prepayment and the principal amount you would owe using a similar mortgage rate.

L

Land Transfer Tax

A tax that is charged for the transfer of property from one homeowner to another. All provinces have a land transfer tax, except Alberta and Saskatchewan, who instead levy a much smaller transfer fee. In most provinces, land transfer tax is calculated as a percentage of the property value. Homebuyers in Toronto, unfortunately, have to pay an additional municipal land transfer tax, on top of the provincial land transfer tax. 

Land Transfer Tax Rebate 

To help offset the cost of land transfer tax, Ontario, British Columbia, Prince Edward Island and the City of Toronto offer land transfer tax rebates to first-time homebuyers. 

Lender / Provider

The financial institution that lends you money to purchase a home. 

Lien

A lien is basically a notice attached to the title of your property that says you owe some creditors money. Your mortgage is one example of a property lien. Letting your property taxes or utilities go into arrear are two other examples. In order to sell your home and transfer the title to a new homeowner, you need to repay those debts and clear the title of any liens against your property. 

Loan-to-Value Ratio (LTV)

A term used to express the ratio of your mortgage loan compared to the value of the property. For example, if you borrow $300,000 to purchase a $350,000 home, your LTV ratio is $300,000 / $350,000 or 86%. To make up the full 100%, you would have to make a 14% (100% – 86%) down payment, which in this case would be $50,000. The higher your LTV ratio is, the riskier your loan is for the lender. 

Lump Sum Payment

A one-time payment for the total or partial value of your outstanding mortgage balance. 

M 

Market Value (or Assessed Value)

The price your home could sell for in the current marketplace. An appraisal must be done, in order to determine the market value of your home. 

Maturity Date

The last day of your current mortgage term. 

Maximum Affordability

The maximum amount a lender is willing to give you to purchase a home, as outlined during the mortgage pre-approval process. 

Monetary Policy Report

A quarterly report that presents the Bank of Canada’s projection for inflation, any growth in the Canadian economy, and its current risk assessment of household debt levels. 

Monthly Mortgage Payment

When your mortgage payment is withdrawn from your bank account on the same day of each month (i.e. on the 1st), so you make 12 payments per year. 

Mortgage

The loan you borrow from a lender, in order to purchase a home. 

Mortgagee and Mortgagor 

The lender is the mortgagee and the borrower is the mortgagor.

Mortgage Application

The document you submit to the lender, in order to be approved for a mortgage loan. A mortgage application will include information about the property, as well as the financial and background information about the borrower(s). Mortgage underwriters use the information to determine how much money they will lend to the borrower(s), for how long and at what interest rate. 

Mortgage Approval

Not to be confused with a mortgage pre-approval, a mortgage approval comes after you’ve submitted an Offer to Purchase, the seller has accepted and you want to secure financing to purchase the home. At this stage, you submit your completed mortgage application and wait to find out if it’s been approved. 

Mortgage Broker

A licensed mortgage specialist who has access to multiple lenders and mortgage rates. A mortgage broker can find the right mortgage product for you, negotiate a better rate on your behalf and pass on volume discounts to you. 

Mortgage Default Insurance

Commonly known as CMHC insurance, mortgage default insurance is a mandatory type of insurance that Canadians have to purchase if they cannot make a down payment of 20% or more. Mortgage default insurance protects your lender, in case you ever defaulted on your mortgage loan. 

Mortgage Life Insurance

If you die, get a terminal illness, or suffer an accident, your mortgage life insurance may pay benefits.

Mortgage Pre-Approval 

An evaluation of your credit score, down payment amount and debt service ratios, used to determine your maximum affordability. A mortgage broker or lender can then show you the maximum purchase price you can consider, as well as the mortgage rate and payment that would go along with it. When you get pre-approved, you can also get a rate hold, which guarantees the lowest rate for a specific period of time. 

Mortgage Rate

The interest rate changed by the lender you borrow money from to purchase a home. 

Mortgage Renewal

At the end of your current mortgage term, if you still have a balance on your mortgage, you will need to renew it for another term. It’s important to shop around for the best mortgage rate and product before your maturity date, otherwise your lender may automatically renew your mortgage for another term. 

Mortgage Term

The length of time you commit to one mortgage rate, lender, and associated mortgage terms and conditions. The term you choose will have a direct effect on your mortgage rate, with short terms historically proven to come with lower rates than long terms. 

N 

New to Canada Mortgage

The mortgage financing process that those who are new to Canada must undergo, which includes having to submit extra supporting documentation than permanent residents, and potentially needing to use one of the mortgage default insurance providers’ New to Canada mortgage programs. 

O

Offer to Purchase

Drafted by the buyer’s real estate agent, this is the initial offer made to the seller. A deposit is usually included with the offer, and if the buyer changes their mind, the seller has the right to keep the deposit. 

Open Mortgage

A mortgage that can be prepaid, even in-full, at any time throughout the mortgage term, without the borrower having to pay a hefty prepayment penalty. However, open mortgages come with a premium – typically in the form of much higher mortgage rates. 

P 

Payment Frequency 

How often you make your mortgage payments – weekly, rapid weekly, bi-weekly, rapid bi-weekly, monthly or bi-monthly.

PITH

Your monthly housing costs – mortgage principal + interest, taxes and heating expenses – used when calculating your debt service ratios and determining your maximum affordability. 

Portable Mortgage

A mortgage that can be ported from one home to another. If you’re selling one home and buying a new one, you would want to port your mortgage to the new home if your interest rate was lower than today’s best rate. 

Prepayment Options

The flexibility to increase your monthly mortgage payments and/or make a lump sum payment against the principal of your outstanding mortgage balance each year. 

Prepayment Penalty

The penalty you have to pay if your break your mortgage term early. If you have a fixed rate mortgage term, your penalty is the greater of three months’ interest or the interest rate differential. If you have a variable rate mortgage term, your penalty is just three months’ interest. 

Prepayment Privilege 

The ability to prepay all or a portion of the principal balance. Prepayment charges may be incurred on the exercise of prepayment options.

Prime Rate

Technically, it’s the interest rate lenders charge their best customers. When it comes to mortgages, however, you’ll only hear about Prime rate if you take out a variable rate mortgage term, which is quoted to you as Prime +/- a percentage. If the lender’s Prime rate goes up or down, your mortgage rate and payment will follow. 

Principal

The amount borrowed or the amount still owed on a loan, separate from interest. 

Private Mortgage

A short-term interest-only loan taken out by someone who doesn’t qualify for prime or bad credit lending. Private mortgages have an average amortization of 1-3 years, during which time the borrower only pays off the interest accumulated each month; at an annual rate of 10-18%, the payments aren’t cheap. At the end of the term, most homeowners transfer their private mortgage to a traditional lender. 

Property Insurance 

Your lender will most likely require you to have insurance coverage to protect your home in case of damage from unforeseen circumstances such as fire or natural disasters.

Property Tax

Your municipality’s tax rate multiplied by the market value of your property; this amount is due once per year. 

Purchase Price

Not to be confused with the market value, this is the actual price you purchase a home for. 

R

Rate Hold

A time period (typically 30-120 days) during which you can lock in the current best mortgage rate. If rates go down during this time, most lenders will honour the lower rate. 

Real Estate Agent / Realtor

The professional who will help you find the home you want to buy and/or help you sell your current home. 

Real Estate Lawyer

Whether you’re buying, selling or refinance, you need to hire a lawyer who can facilitate your entire real estate transaction. A real estate lawyer’s job is to make sure all of your paperwork and transactions are filed accordingly, from reviewing your offers and agreements, to conducting a title search on your home, registering the title in your name and making sure all of your payments are made in-full and on-time. 

Refinancing 

Usually done to access additional funds, or to lower other borrowing costs by taking advantage of a lower interest rate. Refinancing can help you consolidate debt or pay for large expenses like education or renovations.

Renewal 

At the end of a mortgage term, the mortgage may “roll over” on new terms and conditions (usually length of time and interest rate) acceptable to both the lender and the borrower. This is known as renewing a mortgage. Otherwise, the lender is entitled to be repaid in full. 

Reverse Mortgage

A mortgage product for homeowners who were mortgage-free but who want to borrow money against the value of their home. Commonly used by seniors, no repayment is required until the home is sold or the homeowner dies. 

S

Second Mortgage

An additional loan taken out on a property that is already mortgaged. For the lender, this is riskier than the first mortgage, because they are in second position on the property’s title. If the homeowner defaulted on their payments and the property was taken into possession, the lender in first position would always be paid out first, whereas the lender in second position runs the risk of not being repaid. To compensate for this risk, mortgage rates for second mortgages are always higher than for principal mortgages. 

Self-Employed Mortgage

The mortgage financing process those who are self-employed have to go through, which includes submitting personal tax Notices of Assessment with the mortgage application, and potentially even some third-party income validation. There are, however, some lenders who cater to the self-employed and will look at credit history over income generation. 

Security 

In the case of mortgages, real estate offered as collateral for the loan.

Skipped Payment

Many lenders give borrowers the option to skip between 1 and 4 monthly mortgage payments each year. If you decide to skip a payment, you won’t be making one of your regular mortgage payments (principal + interest). Note that when you skip a payment, not only do you miss the opportunity to pay down your mortgage balance, the interest is still charged and added to your mortgage balance. 

Statement of Adjustments

On closing day, when everything else is said and done, two statements of adjustments are made: one for the buyer and one for the seller. Each statement is made by the respective real estate lawyer and outlines the closing costs each person will have to pay that day. 

T

Terms and Conditions

The terms and conditions outlined in your mortgage agreement should be carefully considered. Some of the most common are: whether your mortgage is collateral or not, portable or assumable, what your prepayment options are and how a potential prepayment penalty would be calculated. 

Total Debt Service Ratio (TDS)

The debt service ratio calculation used to determine how much you can afford to pay each month to own a property and fulfill your other debt commitments. Your lender adds up your monthly mortgage payment, property taxes, utilities and minimum debt repayments, and divides the total by your gross monthly income. If the answer equals less than 40 per cent (industry standard), your lender can feel confident in your ability to make all of your monthly payments. The maximum TDS allowed is 44%. 

U

Utilities

Additional monthly carrying costs you will need to pay for, for services such as your water, electricity, heating, cable, phone, Internet, etc. 

V

Variable Mortgage Rate

A mortgage rate that is attached to Prime rate. For example, Prime – 0.25%. If your lender’s Prime rate goes up or down, your mortgage rate and payment amount will follow. Though Prime rate can fluctuate, your rate’s relationship to Prime will stay constant over your term. Variable rates are usually lower, but they don’t offer the same stability that a fixed rate does. 

W

Weekly Mortgage Payment

When your monthly mortgage payment is multiplied by 12 months and divided by the 52 weeks in a year. The amount is withdrawn from your bank account every week, so you make 52 payments per year. 

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