Definitions of terms commonly used for mortgage loan applications
3-Months Interest Penalty
A penalty for breaking a closed mortgage prior to the end of the term which consists of 3 months of interest at your existing mortgage rate being charged on the current mortgage balance.
The period of time over which a mortgage will be paid off, assuming payments remain constant and no additional pre-payments are made. The shorter the amortization chosen, the faster the mortgage will be paid off but the larger the mortgage payments will be. A shorter amortization period will also result in lower interest payable over the life of the mortgage, all else being equal.
A cost assessment of the property to confirm market value which may be required when obtaining a mortgage.
Costs associated with purchasing a property, including: land transfer taxes, lawyer fees, title insurance, appraisal, home inspection, etc. It is generally recommended to have at least 1.5% of the property value saved for closing costs.
When your down payment is less than 20% of the purchase price of the property, you are required to pay a CMHC insurance premium. This insurance premium does not have to be paid up front and is usually added to the mortgage loan. The purpose of the mortgage insurance is to protect lenders in case of borrower default.
Mandatory monthly fees associated with maintenance of a condominium payable by the condo owners.
A mortgage that does not exceed 80% of the property value.
The amount of personal money that is put down for a home purchase. The minimum down payment generally has to be 5% of the property's purchase price.
A document required only for condominium purchases which has many important disclosures pertaining to the condominium building.
Fixed Closed Mortgage
A mortgage with a rate that is constant for the duration of the term and pre-payment restrictions.
A mortgage with a rate that is constant for the duration of the term.
Fixed Open Mortgage
A mortgage with a rate that is constant for the duration of the term and no pre-payment restrictions.
The act of the lender taking possession of a property after the borrower's inability to keep up with the mortgage payments.
Home Equity Line of Credit (HELOC)
A line of credit with a specified limit secured against a property which can be drawn upon.
Gross Debt Service (GDS) Ratio
A calculation that is used as one of the factors by lenders to determine mortgage affordability. It is calculated as the mortgage payment + property taxes + heating + condo fees (if applicable) divided by the gross household income. Most lenders require this ratio to be above 32%.
High Ratio Mortgage
A mortgage that exceeds 80% of the property value. High ratio mortgages require CMHC Insurance.
Property value - loans outstanding against the property.
A home inspection helps figure out whether there are any defects with the property and the type of renovations which may be required. While it's not mandatory, paying for a home inspection is often recommended prior to executing the purchase agreement.
Protection for your property against fire, floods, etc. Having adequate home insurance is often a condition to obtain a mortgage.
Interest Rate Differential (IRD) Penalty
A penalty for breaking a closed mortgage prior to the end of the term which takes into account the difference between the current interest rate on your mortgage and a comparative rate for a mortgage with a term closest to the remainder of your term. This difference in rates is multiplied by the outstanding mortgage balance and months remaining on your term. It is important to note that there are variations in the way the IRD penalty is calculated across lenders.
Land Transfer Tax
Tax levied for property purchases in all provinces except for Alberta and Saskatchewan, where other fees are charged instead. It is generally calculated as a percentage of the property price.
Land Transfer Tax Rebate
In Ontario, BC and PEI you may be eligible for a rebate on your land transfer taxes if you're a first time homebuyer and meet certain conditions.
A loan made against a property which serves as the security for the loan.
The amount of money you're looking to borrow. If you're purchasing a home, it is the difference between the purchase price and the down payment you have. If you're renewing, it is the outstanding mortgage amount you have at the renewal date. If you're re-financing, it is your outstanding mortgage amount plus any additional equity that you'd like to take out of your home.
A licenced individual who sells mortgages on behalf of lenders. Brokers can offer the home buyer a variety of different mortgage products.
Can be a bank, credit union, trust company and even a private company/individual who sell mortgages. Banks make up the bulk of mortgage lending in Canada.
The mortgage balance.
The interest rate on a mortgage loan.
Unless a mortgage is an open mortgage, it will have pre-payment restrictions preventing the borrower from paying off, refinancing or renewing the mortgage prior to maturity. These pre-payment restrictions fall into two categories: monthly payment increases and lump sum payments. The restrictions prevent increasing the mortgage payment above a specified percentage of the regular payment amount and/or making a lump sum payment in a given year above the specified percentage of the outstanding mortgage balance.
Taxes charged by the municipality on a property.
PST on Mortgage Insurance
In Ontario, Manitoba and Quebec you must pay provincial tax (PST) on the mortgage insurance premium. This amount must be paid up front and cannot be added to the mortgage amount like the mortgage insurance premium.
The length of time for which the specific lender/broker will guarantee the mortgage rate upon approval regardless of changes in interest rates.
The act of renegotiating the mortgage contract prior to maturity. Refinancing is usually done to take advantage of a lower mortgage rate or take out more equity on the home.
The length of time the mortgage terms and conditions are in effect.
Insurance required by many lenders in order to obtain a mortgage which protects the homeowner from challenges and/or problems with their ownership of the property.
Total Debt Service (TDS) Ratio
A calculation that is used as one of the factors by lenders to determine mortgage affordability. It is calculated as the mortgage payment + property taxes + heating + condo fees (if applicable) + monthly debt payments divided by the gross household income. Most lenders require this ratio to be above 40%.
Variable Closed Mortgage
A mortgage with a rate that can fluctuate with the prime lending rate throughout the term and no pre-payment restrictions.
A mortgage with a rate that can fluctuate with the prime lending rate throughout the term.
Variable Open Mortgage
A mortgage with a rate that can fluctuate with the prime lending rate throughout the term and no pre-payment restrictions
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