When it comes to getting a home mortgage, you will come across many mortgage terms in your home buying journey. Becoming familiar with the following terms will help you with your mortgage and home buying decisions.
Amortization Period: The period of time required to completely pay off a mortgage if all conditions are met and all payments are made on time.
Appraisal: An estimate of the current market value of a home.
Assets: What you own or can call upon. Often used in determining net worth or in securing financing.
Assumption Agreement: Legal document signed by a buyer that requires the buyer assume responsibility for the obligations of an existing mortgage. If someone assumes your mortgage, make sure that you get a release from the mortgage company to ensure that you are no longer liable for the debt.
Blended Payment: Regular mortgage instalment that includes payments toward both the mortgage principal and the interest.
Closing Costs: The legal fees, transfer fees, disbursements and other costs that must be paid when buying a home. These are in addition to the down payment and the GST and HST if applicable. Closing costs are due on the day the buyer officially takes ownership of the home, and they usually range from 1.5% to 2% of the purchase price.
Closing Date: The date when the sale of the property becomes final and the new owner takes possession of the home.
Closed Mortgage: A mortgage that can’t normally be paid off or renegotiated before the end of the term without the lender’s permission and a financial penalty. Some closed mortgages allow for extra or accelerated payments, but only if specified in the mortgage agreement.
Commitment Letter (or “mortgage approval): A written notification from a lender to a borrower that says a mortgage loan of a specific amount is approved under specific terms and conditions.
Conditional Offer: An offer to purchase a home that includes one or more conditions (for example, a condition that the buyer is able to get a mortgage) that must be met before the sale can be officially completed.
Conventional Mortgage: A mortgage loan equal to or less than 80% of the value of a property. (i.e down payment is at least 20%.) Conventional mortgages don’t usually require mortgage loan insurance.
Credit History (or “credit report”): The report a lender uses to determine if a person should get a mortgage.
Deposit: A sum of money deposited in trust by the purchaser on making an offer to purchase. When the offer is accepted by the vendor (seller), the deposit is held in trust by the listing real estate broker, lawyer, or notary until the closing of the sale, at which point it is given to the vendor. If a house does not close because of the purchaser’s failure to comply with the terms set out in the offer, the purchaser forgoes the deposit, and it is given to the vendor as compensation for the breaking of the contract (the offer).
Equity: The difference between the market value of the property and any outstanding mortgages registered against the property. This difference belongs to the owner of that property.
First Mortgage: A debt registered against a property that has first call on that property.
Fixed Rate Mortgage: The interest rate doesn’t change for the term of the mortgage.
Gross Debt Service (GDS): The percentage of a person or household’s gross monthly income that goes to pay the mortgage principal and interest, property taxes and heating costs, plus as applicable: 50% of any condominium fees.
Guarantor: A person with an established credit rating and sufficient earnings who guarantees to repay the loan for the borrower if the borrower does not.
High-Ratio Mortgage: A mortgage loan that is over 80% of the lending value of a home. This means the down payment is less than 20% and will likely require mortgage loan insurance.
Home Equity Line of Credit (HELOC): A personal line of credit secured against the borrower’s property.
Home Inspection: Buyers, sellers, owners or anyone who needs independent information about a property can hire a Registered Home Inspector (RHI) to do a home inspection. The inspection confirms a home’s condition, identifies needed repairs and helps you decide whether to buy a property. Lenders may ask for a home inspection report when you apply for a mortgage.
Interest Adjustment Date (IAD): The date on which the mortgage term will begin. This date is usually the first day of the month following the closing. The interest cost for those days from the closing date to the first of the month are usually paid at closing.
Land Transfer Tax: A tax charged by many provinces and municipalities (usually a percentage of the purchase price) that the buyer must pay upon closing.
Legal Fees: After you sign your offer to purchase, you’ll need to hire a real estate lawyer to handle your home purchase which includes conducting a title search, registering your new place in your name, and making sure the down payment and land transfer tax goes to the correct offices on time.
Lump Sum Prepayment: An extra payment that is made to reduce the principal balance of a mortgage, with or without a penalty. Lump sum payments can help borrowers save on interest costs and pay off their mortgage sooner.
Mortgage Term: The length of time that the interest rate you choose are in effect. It can be anywhere from 1 year to 10 years.
Mortgage Stress Test: You will need to pass a “stress test” in order to qualify for a mortgage loan with federally regulated lenders and credit unions. The stress test exercise ensures that you can afford payments at a qualifying interest rate that is typically higher than the actual rate in your mortgage contract. This helps ensure that homebuyers won’t take on too much debt and will have the means to make their mortgage payments if interest rates rise or their income decreases
Mortgage Loan Insurance: Insurance that protects a lender against default on a mortgage. Mortgage loan insurance is provided by CMHC or other insurers and is usually required for any mortgage where the down payment is less than 20% of the purchase price or lending value of a home. Mortgage loan insurance helps Canadians purchase homes earlier and at interest rates that are comparable to buyers with a larger down payment.
Open Mortgage: Allows borrower to pay off your mortgage in full or in part at any time without any penalties.
Offer to Purchase: A written contract that sets out the terms and conditions under which a buyer agrees to buy a home. If the offer is accepted by the seller, it becomes a legally binding agreement.
Prepayment Options: The ability to make extra payments, increase your payments or pay off your mortgage early without incurring a penalty.
Portability: An option that lets you transfer or switch your mortgage to another home with little or no penalty when you sell your existing home. Mortgage loan insurance can also be transferred to the new home.
Refinance: Refers to the replacement of an existing debt obligation with a debt obligation under different terms. The most common consumer refinancing is for a home mortgage.
Renewal: When the mortgage term has concluded, your mortgage is up for renewal. It is open at this time for prepayment in part or in full, then renew with same lender or transfer to another lender at no cost.
Second Mortgage: A debt registered against a property that is secured by a second charge on the property.
Status Certificate: A certificate that outlines the financial and legal status of a condominium corporation.
Switch: To transfer an existing mortgage from one financial institution to another.
Taxes on Mortgage Insurance: All-high-ratio mortgages (where the borrower’s down payment is less than 20% of the home’s purchase price) require mortgage default insurance from an insurer. The insurance premium is normally added to the mortgage and paid by the homeowners but tax on the insurance is paid at the closing by the home buyers.
Title Insurance: Title insurance protects home owners against losses arising from challenges to the ownership of your home. Examples include fraud and forgery and title defects (such as unpaid liens on the property, encroachments, etc.).
Total Debt Service (TDS): The percentage of a person or household’s gross monthly income that goes to pay the mortgage principal and interest, property taxes and heating costs, plus all other debt obligations such as car payments, personal loans or credit card debt.
Variable Rate Mortgage: The interest rate fluctuates with market rates.
Vendor Take Back (VTB) Mortgage: A mortgage provided by the vendor (seller) to the buyer.