Mortgage Glossary

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• 3-Months’ Interest Penalty
  A 3-months’ interest penalty is commonly charged by lenders if you break your mortgage before the end of the term. This is the default penalty for most variable- and adjustable-rate mortgages. Fixed mortgages are usually the greater of three months’ interest or the interest rate differential (IRD).

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A

• Accrued Interest
  Accrued interest is the total amount of interest due on a debt, such as a mortgage, that has yet to be paid by the borrower. Most people have monthly mortgage payments and so interest accrues over the course of each month until the next payment date.
  
• Adjustable-rate Mortgage
  An adjustable-rate mortgage is another name for a variable-rate mortgage, which has an interest rate and payment that rises and falls with a benchmark, typically prime rate. However, some lenders offer fixed-payment adjustable-rate mortgages, where the payment stays the same for the term even as the rate rises or falls. In this case, the amount of the payment that goes towards principal repayment and interest will fluctuate.
  
• Amortization
  Amortization is the period of time required to pay off your mortgage. The maximum allowable amortization for default-insured mortgages is 25 years. Most mainstream lenders also offer 30-year amortizations on uninsured mortgages. A few lenders even offer 35 years.
  
• Appraisal
  An appraisal is an assessment of the value of a property you’re mortgaging. An appraisal of some sort, either in person or automated, is always conducted when you apply for a mortgage. As a homebuyer, you are generally responsible for the appraisal cost.

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C

• Canada Mortgage and Housing Corporation (CMHC)
  The Canada Mortgage and Housing Corporation (CMHC) is Canada’s national housing agency and a leading authority on the Canadian housing market. The CMHC provides mortgage default insurance to protect lenders if you default on your mortgage. Insurance is mandatory if you’re buying a home with less than 20% down payment (i.e., when you’re getting a “high-ratio” mortgage).
  
• Closing Costs
  Closing costs are expenses you must incur to close a home purchase and/or mortgage. They can include land transfer taxes, lawyer fees, title insurance, appraisal, home inspection, etc. It is recommended that you set aside funds equaling at least 1.5% of the property value for closing costs.
  
• Closed Mortgage
  A closed mortgage is one that has prepayment restrictions. For example, if you had a closed 5-year fixed mortgage with 20% annual prepayment privileges, you could not pay back more than 20% of the mortgage amount—plus your normal payments—before maturity. If you did, you would incur a prepayment charge (a.k.a. penalty). A fully closed mortgage does not allow prepayment in full before maturity, regardless of penalty.
  
• CMHC Premium
  When you buy a primary residence with a down payment of less than 20% of the purchase price, you are required to apply for CMHC Mortgage Loan Insurance. This default insurance protects your lender in case you don’t pay them back. The CMHC Mortgage Loan Insurance premium is calculated as a percentage of your loan and is based on the amount of equity you have. Mortgage insurance premiums increase with the loan-to-value.
  
• Condo Fees
  Condo fees refer to the mandatory monthly fees your condo (a.k.a. strata) building charges for the maintenance of a condominium. When purchasing a condo, it is recommended you pay careful attention to condo fees as they can vary widely from building to building, depending on things like the building’s age, number of units, condition and amenities.
  
• Conventional Mortgage
  A conventional mortgage is one that does not exceed 80% of the property value. If you put down at least a 20% down payment, you’ll have a conventional mortgage. Having a conventional mortgage also means you’re not required to purchase default insurance.
  
• Credit Score
  Your credit score is a three-digit number that represents your creditworthiness. It factors in things like your payment timeliness, the amount of debt you have relative to your credit limits, and the length of your credit history. In Canada, credit scores range from 300 to 900. Credit scores above 680 are sufficient for most mortgage purposes. A higher score shows the lender that you have a better likelihood of repaying your debts on time.

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D

• Down Payment
  The down payment is the amount of cash a buyer pays upfront for a home purchase. The minimum down payment must be at least 5% of a property's purchase price if it is valued under $500,000. Properties valued between $500,000 and $999,999 require a down payment of 5% on the first $500,000, and 10% on the remaining amount. If the purchase price exceeds $999,999.99, you must put down at least a 20% down payment. Your mortgage is calculated based on the value of the property minus your down payment.

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E

• Estoppel Certificate
  An estoppel certificate is a legal document required for condominium purchases in many provinces. It contains important disclosures about the condo fees for a unit, including any unpaid amounts. It can also refer to a legally binding disclosure whereby the tenant certifies the terms of his/her lease and relationship with the landlord.

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F

• Fixed Mortgage
  A fixed mortgage features a rate and payment that is constant for the duration of the term and does not change. Five-year fixed mortgages are the most popular types of mortgages in Canada.
  
• Fixed Open Mortgage
  A fixed open mortgage features an interest rate that remains constant for the duration of the term, and does not entail any pre-payment restrictions.
  
• Foreclosure
  With a mortgage, your property serves as collateral until you pay the mortgage off. If you cannot do so, the lender retains the right to sell the property to recoup its loan. Foreclosure refers to the act of a lender taking possession of a property after a borrower defaults on his or her mortgage obligations.

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G

• Gross Debt Service (GDS) Ratio
  Your Gross Debt Service Ratio is a calculation used by lenders to estimate whether you can afford your mortgage. It equals your mortgage payment + property taxes + heating + 50% of condo fees (if applicable), divided by the gross household income. Most lenders limit this ratio to 39% or less, with 32% being the traditionally recommended limit in order to be approved for a mortgage. The GDS must be no more than 35% for mortgages insured by CMHC.

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H

• High-Ratio Buyer
  A high-ratio buyer is a homebuyer that makes less than a 20% down payment. For example, if you put down 5% on a property, you would be considered a high-ratio buyer. As a high-ratio buyer, you must purchase mortgage default insurance from CMHC, Sagen (formerly Genworth Canada) or Canada Guaranty.
  
• High-Ratio Mortgage
  A high-ratio mortgage exceeds 80% of the property value. When you put less than 20% down, you have a high-ratio mortgage as more than 80% of the property’s cost is mortgaged. With a high-ratio mortgage, you are required to buy default insurance to protect your lender from missed payments.
  
• Home Buyers' Plan (HBP)
  The Home Buyers' Plan is a federal government program that allows first-time homebuyers to withdraw up to $35,000 from an individual's RRSP savings, tax free, to use towards the purchase of a home. You are considered a first-time home buyer if,in the four years prior to your home purchase you did not live in a home that you owned, or one that your current spouse or common-law partner owned. Any of the funds you withdraw under the plan must be repaid within 15 years, or they’ll be deemed taxable income.
  
• Home Equity
  Home equity is the difference between what your property is worth and what you owe on it. On the day you close on a home purchase, your home equity consists of the appraised value of the property minus your mortgage amount.
  
• Home Equity Line of Credit (HELOC)
  A home equity line of credit (HELOC) is a line of credit secured against your home. Home equity lines of credit are revolving, meaning you can borrow more money up to your approved limit at any time, so long as you make the minimum interest payments each month. HELOCs in Canada cannot exceed 65% of the home's value, unless they are combined with a mortgage. In that case, the HELOC amount can go up to 80% of your home's value, however that 15% is an amortized portion, meaning it must be repaid in regular monthly instalments, similar to your mortgage payments. To learn more about HELOC mortgages, visit our HELOC page.
  
• Home Inspection
  A home inspection is the examination of a home for the purpose of finding defects. As a homebuyer, you shouldn’t hesitate to pay for a home inspection as it can help you avoid thousands of dollars in surprise expenses. Home inspections frequently turn up issues with a property that can influence your buying decision.
  
• Home Insurance
  Home insurance reimburses you for damage caused by perils such as fire, floods and theft. Lenders require you to have home insurance in order to get a mortgage on a property. Here is more information.

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I

• Interest Rate Differential (IRD) Penalty
  Interest rate differential (IRD) penalties apply if you break a closed fixed mortgage before the end of the term. The IRD penalty takes into account the difference between the current interest rate on your mortgage and the rate your lender can get today on a term closest to the time remaining on your term. There are key variations in the way IRD penalties are calculated, with Canada’s big banks typically having among the highest prepayment penalties.

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L

• Land Transfer Tax
  In most provinces, when you buy a home you are subject to a land transfer tax on closing. This tax is levied for most property purchases in all provinces, except for Alberta and Saskatchewan. Land transfer tax is generally calculated as a percentage of the property price. For more information, check out our guide on land transfer taxes here.
  
• Land Transfer Tax Rebate
  In Ontario, B.C. 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. Learn more about the Ontario Land Transfer Tax Rebate to see if you’re eligible. If you’re a B.C. resident, check out the British Columbia Property Transfer Tax Exemptions. For Prince Edward Island, see the PEI Property Transfer Tax Exemptions.

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M

• Mortgage
  If you’re looking to purchase a home, chances are you can’t pay for it in cash. Mortgages are loans secured against a property. Once approved, you repay the loan according to agreed-upon terms, which include a specified interest rate, payment amount, term and amortization, among other things.
  
• Mortgage Amount
  The mortgage amount is the balance owing on your loan. It can also refer to the money you're looking to borrow. If you're purchasing a home, the mortgage amount is the difference between the purchase price and the down payment, plus any default insurance fees that you finance. If you're renewing, the mortgage amount is the mortgage balance remaining at the renewal date. If you're refinancing, it is your outstanding mortgage amount plus any additional equity that you'd like to take out of your home.
  
• Mortgage Broker
  A mortgage broker is an individual who sells mortgages on behalf of multiple lenders. When you plan to buy a new home or refinance your existing home, a broker can help you compare the best loan options from various lenders. They also assist you throughout the mortgage process by gathering your financial information, obtaining your credit report, processing income statements and managing the application and closing process on your behalf. In most provinces, brokers are licensed.
  
• Mortgage Default Insurance
  Mortgage Default Insurance protects the mortgage lender from losses should the homeowner default on their mortgage loan. This coverage is mandatory for all buyers making less than a 20% down payment, and premiums are usually bundled into the mortgage. In Ontario, Quebec, Saskatchewan and Manitoba, provincial tax on the premiums applies and must be paid out of pocket at closing.
  
• Mortgage Lender
  A mortgage lender is an entity that lends money for the purchase of property. The loan is then secured by the collateral of that property. Mortgage lenders can include banks, credit unions, trust companies, mortgage finance companies, insurance companies or private companies/individuals such as mortgage brokers that lend his/her own money. Banks make up the bulk of mortgage lending in Canada.
  
• Mortgage Pre-approval
  A mortgage pre-approval establishes your eligibility for a mortgage, taking into account your income, credit and debt ratios. A pre-approval tells you the mortgage amount you qualify for and holds a rate for up to 90-130 days. A pre-approval is not an official mortgage approval, but rather a preliminary assessment of your qualifications. A pre-approval is usually subject to an appraisal and a later review of your income, purchase agreement and down payment documentation. To avoid surprises, look for a lender that reviews all key documentation at the time you apply.
  
• Mortgage Principal
  The mortgage principal is the total amount of money owing to the lender. If your mortgage balance is $450,000, then the mortgage principal is $450,000. Upon closing, you are obligated to make instalment payments to the lender, which typically include principal and interest portions. Any balance owing at maturity must be repaid in full at that time unless you renew with the lender.
  
• Mortgage Rate
  A mortgage rate refers to the rate of interest charged on a mortgage loan, expressed as a percentage of the loan principal. To see the current best mortgage rates in Canada, visit our mortgage page here.
  
• Mortgage Rate Type
  There are two main types of mortgage rates in Canada:
  1) Fixed mortgage rates, which guarantee a set interest rate for the duration of the mortgage term
  2) Variable mortgage rates, which fluctuate based on changes in the lender’s prime rate, which in turn typically changes following an increase or cut in the Bank of Canada’s overnight target rate.
  
• Mortgage Term
  The mortgage term is the length of the mortgage contract. The mortgage rate discount, terms and conditions are guaranteed for this amount of time. A 5-year fixed mortgage has a mortgage term of five years, for example.

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O

• Offer Conditions (a.k.a. Subjects)
  Offer conditions are contingencies that a buyer writes into a real estate purchase offer. These conditions must be met in order for the home sale to close. Common examples include financing, appraisal, sale of an existing property and home inspection conditions.

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P

• Prime Rate
  Prime rate is a floating interest rate that lenders make available to good customers. It almost always moves with the Bank of Canada’s overnight target rate. Each lender has its own prime rate, but Canada’s official benchmark prime rate is calculated by the Bank of Canada. It equals the mode average of the Big 6 Banks’ prime rates.
  
• Prepayment Options
  Prepayment options are a mortgage feature that allows borrowers to pay extra against their mortgage without penalty. They include lump-sum payments, accelerated payments and double-up payments, to name a few. They all serve the same purpose, which is to decrease the mortgage amount faster than scheduled (and thus shorten your amortization) and reduce the amount of interest you pay over time.
  
• Prepayment Restrictions
  Unless a mortgage is an open mortgage, it will have prepayment restrictions. In some cases, such restrictions can prevent the borrower from paying off, refinancing or renewing the mortgage prior to maturity. In most cases, the lender simply limits the amount you can prepay in any given year. A 20% annual prepayment limit, for example, means you can pay up to an additional 20% of the original mortgage balance each year without penalty, on top of your other allowed payments.
  
• Property taxes
  Property tax is paid to your municipality for services like garbage collection, snow plowing, police and fire protection. Your property tax amount depends on your location and property value. In some cases, your lender will collect property taxes with your mortgage payment and remit them to your municipality.
  
• PST on Mortgage Insurance
  In Ontario, Manitoba, Saskatchewan and Quebec you must pay provincial tax (PST) on the mortgage insurance premium. This amount must be paid upfront and, unlike default insurance, cannot be added to the mortgage amount.

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R

• Rate hold
  A rate hold is the length of time a lender guarantees your mortgage rate. Rate holds are contingent upon your approval and generally range from 30 days to 130 days. Although, rate holds on new construction can extend up to three years.
  
• Refinancing
  Refinancing your mortgage is the process of taking out a new loan to pay off your existing loan. Refinancing is typically used to secure a lower interest rate, extend the amortization of a mortgage or borrow against your home equity. To learn more about refinancing and if it is right for you, visit our mortgage refinance guide.

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T

• Title Insurance
  Title insurance protects mortgage lenders and homeowners against losses related to the property's title. Among other things, it covers you from most unknown claims on the property that can affect your ownership rights. Most lenders require you to buy title insurance before you can close on the mortgage.
  
• Total Debt Service (TDS) Ratio
  Your total debt service ratio is a calculation lenders use to estimate your ability to afford a mortgage. It is calculated as [the mortgage payment + property taxes + heating + 50% of condo fees (if applicable) + other monthly debt payments] divided by the gross household income. Most lenders require this ratio to be less than 44%, with 40% being the traditional limit. The TDS ratio must be no more than 42% for mortgages insured by CMHC.

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V

• Variable Mortgage
  A variable-rate mortgage, also known as an adjustable-rate mortgage, has an interest rate that fluctuates, typically when prime rate rises or falls. Typically this results in a borrower's monthly mortgage payment fluctuating as the rate changes. Some lenders offer fixed-payment variable-rate mortgages, however, where the monthly payment remains the same but the portions going towards principal repayment and interest will fluctuate instead.
  
• Variable Open Mortgage
  A variable open mortgage features an interest rate that can fluctuate throughout the term (typically when prime rate rises or falls) and does not include any prepayment restrictions.

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