Mortgage glossary
Last updated: July 22, 2022
Canadian mortgages can sometimes be overwhelming and confusing. So, we’ve compiled a list of terms that will help you better understand Canadian mortgages and help you find the best mortgage type that's right for you.
Table of Contents
Adjustable rate mortgage (ARM)
Adjustable rate mortgage is a type of mortgage where the interest rate fluctuates periodically based on bank prime rates. It is also known as the variable rate mortgage.
Amortization period
The amortization period is the length of time it takes to pay off a mortgage entirely, including interest. The amortization period is not the same as a mortgage term and can be up to 5 and 30 years.
Annual lump sum allowance
Annual lump sum allowance is how much you are allowed to pay in addition to what you pay within your regular payment schedule.
Appraisal
An appraisal is a report that indicates the estimated value of a property that is assessed by a qualified professional called an “appraiser”. The buyer is usually responsible for the appraisal cost.
Assumption
Assumption is the legal agreement that involves the purchaser and the seller where the purchaser assumes the payments on an existing mortgage from the seller. Assuming a loan can sometimes save the purchaser money since there are fewer closing costs involved.
Bona fide sales clause
A bona fide sale clause is a clause in your mortgage that says you are not allowed to leave your lender until your mortgage term is up unless you sell the property.
Broker
A broker is an individual or firm who is involved in arranging financing for a client who does not personally loan the funds themselves.
Canada Mortgage and Housing Corporation (CMHC)
Canada Mortgage and Housing Corporation (CMHC) is a Crown corporation and a leading authority on the Canadian housing market. They provide High Ratio Mortgage Insurance by protecting the lenders and guaranteeing them payments on the funds they are lending out, which allows people to obtain homes with a down payment that is less than 20% of the property value.
Closing
Closing is the final step in buying and financing a home, which involves a meeting between the purchaser, vendor and lender. This is where the buyer signs and reviews documents prepared by a lawyer, related to the mortgage process and the property title and ownership is transferred from the seller to the buyer.
Closing Costs
Closing costs are expenses you pay to close a property purchase and sale. The major costs involved include appraisal fees, legal fees, title insurance and land transfer taxes. The closing costs are normally around 3-5% of the purchase price.
Commitment
Commitment is an agreement in writing between a lender and a borrower to loan funds on a specific date. In a commitment there is a set list of conditions that need to be met prior to funding by the borrower in order for the transaction to be properly executed.
Convertible mortgage
A convertible mortgage is a type of short-term mortgage that can be converted into a long-term mortgage without paying a prepayment charge.
Credit report
A credit report is a record of your credit history. It is a report that provides information to the brokers and financial institutions about the applicant’s current and past credit history. A credit report is used by a lender, among other details, to determine whether you accept or deny your mortgage application.
Debt ratios
Debt ratios measure your ability to repay a mortgage by ensuring debt doesn’t exceed a certain percentage of your income.
Default
Default is when the borrower fails to meet legal obligations in the mortgage contract. It is specifically when they fail to make their monthly payments on a mortgage.
Delinquency
Delinquency is when the borrower fails to make their mortgage payments on time. This can lead to a forced sale on the borrower’s home if the borrower fails to make their mortgage payments over several months.
Deposit
A deposit is the amount of money you give a seller when you submit a signed agreement of purchase and sale to buy a property. When the sale closes, the deposit will go towards part of the total purchase price.
Down payment
Down payment are the funds (including deposit) that are provided by the borrower and are put towards the purchase price of a property. Down payments for uninsured mortgages normally range between 20%-25% of the purchase price. If your down payment is less than 20%, you will need to buy mortgage default insurance since your mortgage will be considered as high-ratio.
First-time home buyer incentive (FTHBI)
The first time home buyer incentive is a program by the Government of Canada to provide financial assistance for first-time home buyers. The FTHBI is a shared equity program which allows first time home buyers to borrow up to 10% of the home value towards their down payment. This incentive will reduce the cost of borrowing by lowering your mortgage insurance and interest costs.
Fixed rate mortgages
A fixed rate mortgage is a type of mortgage where the interest rate stays the same for the entire mortgage term. If mortgage rates go up during the term, your rate will stay the same.
Gross Monthly Income
Gross monthly income is the total income that an individual earns per month prior to any expenses or deductions are taken into consideration.
High-ratio mortgage
A high-ratio mortgage has a principal greater than 80% of the property value. If you have a high-ratio mortgage, you will need to buy mortgage default insurance as your mortgage will be considered high-risk.
Home equity
Home equity is the value of your home, minus total outstanding debt such as your mortgage. So if your home is worth $800,000 and your mortgage is $600,000, your home equity is $200,000.
Investor
An investor is a source of funds for a lending institution. The institution then promises a certain rate of return to the investor based on the assessed risk of placing those funds out in the marketplace.
Interest
Interest is the money you pay to your lender for using the funds you borrow. Interest starts accumulating the day you get the funds, also known as funding date.
Land transfer tax
Land transfer tax is a closing cost you must pay to the government on your closing date. It is calculated based on the property’s purchase price. Taxes will vary depending on the province and first time home buyers are sometimes exempt from part of the cost.
Market value
Market value is the lowest price that a seller would agree to have someone purchase his property for. At the same time the highest price a buyer is willing to pay for that same home. Most of the time a home is purchased within 3-4% of the asking price of the seller under normal circumstances.
Maturity date
Maturity date is when your mortgage term ends. When your term ends, you will either renew your mortgage for a new term. Depending on your lender and whether they agree, they might let you pay it off completely.
Mortgage
A mortgage is a type of loan often used to buy a home or property. The property is the security for the loan and a mortgage allows the lender to take possession of the property if you don’t repay the loan on time.
Mortgage assumption
With a mortgage assumption, you take over the seller’s mortgage on the purchased property and accept full responsibility to pay the mortgage according to the existing mortgage terms. You must get the lender’s approval before assuming a seller’s mortgage.
Mortgage broker
A mortgage broker is a licensed individual who works on behalf of home buyers to search for the best mortgage deal among various lenders.
Mortgage pre-approval
A mortgage pre-approval is when a lender pre-approves you for a maximum amount and will let you know how much money your lender may lend you, however it doesn’t guarantee a final approval. You will get a pre-approved mortgage certificate when you are pre-approved. A mortgage pre-approval is mandatory before getting a mortgage.
Mortgage statement
A mortgage statement is a written record of your mortgage status, which includes how much you have paid in principal and interest to date. It will also show you the remaining principal on the mortgage.
Porting a mortgage
If your mortgage is portable, that means you have the ability to move or transfer an existing mortgage, which includes the balance and interest rate, to a new property or home. Not all mortgages are portable.
Posted rate
A posted rate is a lender’s standard advertised interest rate for a mortgage product.
Prepayment (lump sum payment)
Prepayment is when you make additional payments to pay some or all of the mortgage that are not set within the regular payment schedule. Some lenders will charge a penalty fee.
Prepayment Penalty
Prepayment penalty is a penalty charged if you pay out your mortgage prior to its term end. The terms for prepayment are defined in your mortgage agreement.
Prime rate
Lenders usually base the interest charge for their variable mortgages on their prime rate, which is usually based on the interest rate the Bank of Canada sets each night.
Principal
Principal is the amount of money you borrow from a lender. This does not include interest accrued or paid on the mortgage.
Property insurance
Property insurance covers the replacement cost of the home in case of certain unforeseen circumstances such as fire, windstorms or other disasters. Lenders will need proof of property insurance before releasing funds.
Qualify rate
A qualifying rate is the rate a lender will use to determine whether you qualify for the mortgage you applied for. Your lender will use the qualifying rate to calculate your debt-service ratio and will help them determine whether you can repay the mortgage.
REALTOR©
A REALTOR© is a professional who is legally registered with a real estate brokerage firm that provides the services of helping someone find or sell a home.
Refinancing
Refinancing a mortgage refers to the process of revising and replacing the terms of an existing mortgage. Refinancing is usually done to make favourable changes to an interest rate, payment schedule or other terms outlined in your contract. If approved, you will get a new contract that takes the place of the original agreement. You can also refinance to consolidate debt and access the equity in your home to pay for other expenses.
Renewal
Renewal takes place when your mortgage term ends. You might be able to negotiate for another term with your lender.
Second Mortgage
A second mortgage is a loan made in addition to your primary mortgage. People take out a second mortgage in order to get access to money to use towards renovations or personal reasons.
Term
A term is how long you commit to your mortgage rate, along with the conditions set out by your lender. Terms can range from 1 to 10 years. When a term ends, you must pay off the mortgage or renew it for another term if your lender approves.
Title
Title is the ownership you buy when you purchase a property. Any issues or concerns about the property’s title must be resolved before closing and lenders will require a clear title to the property before releasing funds.
Title Insurance
Title insurance is a certificate that is normally distributed by a title insurance company. It guarantees a home buyer’s legal safety against errors in the title search. It also ensures that no other mortgages can be registered without acknowledgment and permission from a lawyer and the originating financial institution.
Porting a mortgage
If your mortgage is portable, that means you have the ability to move or transfer an existing mortgage, which includes the balance and interest rate, to a new property or home. Not all mortgages are portable.
Underwriting
Underwriting is when a decision is made whether to pursue or provide a loan to a potential individual seeking financing. Standard underwriting considerations used to assess a file are credit, employment, and net worth. Based on the information provided an appropriate rate, term and loan amount are offered to the client.
Variable rate mortgage
A variable rate mortgage will fluctuate with the lender’s prime rate, which is usually influenced by the Bank of Canada overnight rate. There are technically 2 sub-types of variable mortgages, adjustable rate mortgages (where your payment moves with interest rate changes) or variable rate mortgages (where your payment stays fixed but your amortization will move to accommodate rate increases).
