Glossary of Mortgage Terms

During the mortgage process, you’re very likely to encounter unfamiliar phrases. Let us de-mystify them for you!

Here are a few key terms that you may come across:

AGREEMENT OF PURCHASE AND SALE

  • A contract by which one party agrees to sell and another agrees to purchase.

AMORTIZATION

  • The time it takes to pay your mortgage balance down to zero.  In other words, it’s the process of paying off the balance owed on the mortgage through scheduled, systematic repayments of principal and extra payments of principal at irregular intervals.  In Canada, mortgage amortization is typically 25 to 30 years, although some lenders offer a 35 year amortization for specific mortgage scenarios.

APPRAISAL

  •  The estimate of the current value of your property for the lender, conducted by a qualified professional.

BRIDGE FINANCING

  • Sometimes called a bridge loan, this is interim financing, to “bridge” between the closing date on the purchase of your new home and the closing date on the sale of your current home.

CLOSED MORTGAGE

  • A mortgage whose terms state that it cannot be paid out, even with a penalty, unless the lender agrees.  In some cases, a closed mortgage may be discharged at a pre-defined cost, usually three months’ interest or the Interest Rate Differential (IRD), which would be explained in full in the mortgage documents.

CLOSING DATE

  • The date of which the sale of the property becomes final and the new owner takes possession.

COMMITMENT LETTER

  • Also commonly called the mortgage commitment, it’s a written agreement, provided by your mortgage lender, to lend mortgage funds under specific terms and conditions.  Typically these will include a requirement to provide documentation that proves your income, where your down payment is coming from, and satisfactory credit.  As well, the commitment letter might require a full appraisal to be conducted on your property to confirm its value.

CONDITIONAL OFFER

  • An offer to purchase a property, subject to specified conditions. These conditions could be the arranging of a mortgage, a satisfactory home inspection, or the selling of a present home. The time limit in which the specified conditions must be met is stipulated.

CONVENTIONAL MORTGAGE

  • A mortgage that is 80% or less of the value of the property.

CREDIT REPORT

  • A record of an individual’s payment history available at a credit bureau. You can order a copy of your own report – which doesn’t negatively impact your credit – by going to either Equifax or TransUnion.

FIXED RATE MORTGAGE

  • The interest rate on this type of mortgage contract is fixed – unchanged – for the term of your mortgage, which can be for 6 months, 1, 2, 3, 4, 5, 7, or 10 years.   The most common term in Canada is a 5 year mortgage term.

GROSS DEBT SERVICE RATIO OR GDS

  • The percentage arrived at by dividing your monthly “shelter” costs (mortgage payments, property taxes, heating, and half of your condo fees, if applicable) by your gross monthly income (i.e. your income before taxes), and multiplying by 100. This is used by all lenders as a yardstick by which to measure the ability of a borrower (or borrowers) to make mortgage payments. For example, most lenders require that this ratio be no more than 34%, but they may allow higher limits – up to 39% – for those with better credit scores.

LAND TRANSFER TAX

LOAN-TO-VALUE RATIO OR LTV

  • The percentage of the value of the property for which a mortgage is required. This ratio is important in determining whether or not default insurance is required, and if so, what the cost of that insurance will be (see “Mortgage Default Insurance”).  For example, if the property value is $500,000, and the down payment you have is $100,000, you’ll need a mortgage of $400,000. The LTV is $400,000/$500,000 or 80%.

MORTGAGE DEFAULT INSURANCE

  • If your down payment is less than 20% of the purchase price of the property, the mortgage lender is going require that the loan be covered through mortgage default insurance, to off-set what they consider their additional risk (because you have less “skin in the game”).  Mortgage default insurance in Canada is typically provide by one of these three insurers:  Genworth, Canada Guaranty, or CMHC. The fee is calculated as a percentage of your mortgage and is included in your monthly payment, usually adding a few dollars to the overall cost per month.  In exchange for this, the lender will offer you great rates.

OPEN MORTGAGE

  • A mortgage that allows you to pay back the borrowed funds without notice or penalty (though there usually is a small fee applied).There are typically two types of open mortgages:
    • Fixed rate open mortgages, where the term is usually fairly short (6 months to a year).  The interest rate will be higher than on a closed mortgage.
    • Variable rate mortgages, where the interest rate fluctuates, and again, will be higher than with a closed variable rate mortgage.

PREPAYMENT PENALTY

  • If your mortgage is not fully open, you may be charged a penalty if you want to pay off all or part of your mortgage before the end of the fixed term. The normal prepayment penalty is the greater of three months’ interest or the Interest Rate Differential (IRD) on the amount you’re paying off.  Each lender has a different way of calculating this, so make sure you read your mortgage documents carefully, and discuss this with your mortgage broker.

PREPAYMENT PRIVILEGES

  • The right to make extra payments on your mortgage.  Typically, these are either “lump sum” payments or increases to your regular payments.  For example, your mortgage contract might say that you’re allowed to make an extra payment on your mortgage of up to 20% of the original amount, once a year, plus you can increase your regular payments by up to 20% of their original amount, once a year.  It’s a great way to reduce the amount of interest you pay to the mortgage lender, and allows you to pay off your mortgage faster.

TOTAL DEBT SERVICE RATIO OR TDS

  • The percentage arrived at by adding your monthly “shelter” costs (mortgage payments, property taxes, heating, and half of your condo fees, if applicable) plus all your other monthly debt obligations, then dividing by your gross monthly income (i.e. your income before taxes), and multiplying by 100. This is used by all lenders as the “upper limit” yardstick by which to measure the ability of a borrower (or borrowers) to make mortgage payments. For example, most lenders require that this ratio be no more than 44% for a particular application, with some as low as 39%. Depending on the situation, a lender may agree to a higher TDS ratio for those applicants with higher credit scores.

VARIABLE RATE MORTGAGE

  • The interest rate on this type of mortgage contract fluctuates along with the prime rate.  For example, your rate might be set at “prime minus .5%”.  If the current prime rate is 2.7%, then your mortgage rate would be 2.2%.   If the prime rate goes up to 3%, then the interest rate you’d be charged on your mortgage would change to 2.5%.  You will choose the term of the contract, which is typically either 3 or 5 years.