Mortgage Terms Explained

Applying for a mortgage is stressful enough, it doesn’t help when foreign, technical words are being thrown around and you’re just expected to know what they all mean. Below are the most common mortgage terms, explained with simple, easy to understand definitions.

A

Accelerated Bi-Weekly Mortgage Payments
Mortgage payments that are made every two weeks, so you will make 26 mortgage payments per year.

Adjustable Rate Mortgage
Also known as an ARM. Mortgage payments change as the interest rate changes periodically.

Amortization
The amount of time it would take the entire mortgage to be paid.

Annual Percentage Rate
The mortgage contract’s interest rate plus and non-interest finance charges.

Appraisal
An assessment of the property’s value done by a qualified individual, known as an appraiser.

Asset
Something you own that has value, like a car.

Assumable Mortgage
A mortgage that allows a buyer to take over the seller’s existing mortgage on the property.

B

Balloon Payment
A payment that is in addition to your monthly mortgage payment, that usually goes directly towards the principal amount of your loan.

Blanket Mortgage
One mortgage that is registered against 2+ properties.

Book Value
The mortgage amount that is still owed at a particular point in time.

Bridge Loan
Also known as interim financing. A second mortgage that gets paid out immediately following the closing date of the buyer’s current home. Usually used when the closing date of the buyer’s old home closes after the purchase of the new home closes.

C

Closed Mortgage
A type of mortgage that is not able to be paid prior to the term’s end.

Closing Costs
Fees that are in addition to the purchase price of the property. These must be paid on the closing date. Costs include legal fees, land transfer taxes, and disbursements.

Closing Date
The day that the mortgage closes (for purchase or refinance).

CMHC
Canada Mortgage and Housing Corporation (CMHC). A Crown corporation that is Canada’s authority on housing. CMHC provides default insurance, which is mandatory for down payments less than 20%.

Collateral
A security pledged for the repayment of a loan if the borrower defaults. For mortgages, the property being mortgaged is the collateral.

Compounding Frequency
The number of times compound interest is charged per year. For example: monthly or semi-annually.

Compound Interest
Interest that is charged at regular intervals. If not immediately paid, will start to earn interest itself.

Conventional Mortgage
A mortgage loan that is up to 80% of the home’s appraised value.

D

Default
When a borrower breaks the terms of their mortgage agreement. Typically this is done by not making the required mortgage payments.

Down Payment
The money that is paid up front for a home. This usually ranges from 5-20% of the home’s value.

E

Early Discharge Penalty
The penalty a borrower faces for breaking their mortgage contract early. Usually 3 months’ worth of interest, or the Interest Rate Differential, whichever is larger.

Effective Annual Rate
Interest rate that is compounded once per year.

Equity
The amount of the property that the homeowner actually owns. Calculated by taking the market value of the property and deducting the amount still owed.

F

Face Value
The loan amount that must be repaid at a specific rate of interest as stated in the contract terms.

Fixed Rate
A fixed rate mortgage means that your interest rate will not change for the length of your term. For the peace of mind of having a rate locked in, fixed rates are usually higher than variable rate mortgages.

Foreclosure
The legal process where the lender sells the property because the borrower has defaulted.

G

Gift Letter
A document stating that the gift giver is giving a gift of a certain amount for the receiver to use as a down payment of a home. It states that the receiver is not expected to pay back the funds, as it is a gift.

Gross Debt Service Ratio
Also known as GDS. The percentage of a borrower’s income that goes towards monthly payments of principal, interest, taxes, heading, and condo fees.

Guarantor
Someone who becomes contingently liable for someone else’s debt.

H

High Ratio Mortgage
A mortgage where the borrower has provide less than a 20% down payment. These types of mortgages require insurance.

Home Equity Line of Credit
Also known as a HELOC. A loan that is secured against your home. You are given a maximum amount that you would be able to borrow, but only take out what you need. Payments are made on what you’ve borrowed.

I

Interest Rate
The percentage rate that represents the cost of borrowing money.

Interest Rate Differential
How lenders calculate the penalty charged for ending a mortgage contract before its term’s end. The interest rate differential is the difference between the interest the lender will make if you continue your mortgage, and what they will make by loaning it to someone else at the current interest rate.

Interim Financing
See bridge loan.

L

Land Transfer Tax
A tax that is charged when a property changes hands.

Loan to Value Ratio (LTV)
The ratio of the mortgage loan amount to the appraised value of the property. For example, a $200 000 home with a down payment of $40 000 would require a mortgage of $160 000, or 80% of the home’s value (80% LTV).

Lump Sum Payment
See Balloon Payment.

M

Market Rate
The expected interest rate at any given point in time.

Market Value
In appraisal, the expected sale price of a property.

Maturity
The date which the final balance owing on a mortgage is due.

Mortgage
A loan that uses property as collateral.

Mortgage Broker
An individual who researches lenders on your behalf, and finds you the best mortgage product for your needs.

Mortgage Default Insurance
Insurance that protects the lender (not the borrower) if the borrower were to default on their mortgage. Required when borrowers put less than 20% down on a property.

Mortgage Life Insurance
Insurance that pays the remainder owing on your mortgage if you die or become disabled.

Mortgagee
The mortgage lender.

Mortgagor
The mortgage borrower.

N

Nominal Rate of Interest
Interest rate quoted as a rate per annum. Nominal rate of interest is equal to the interest rate per compounding period, multiplied by the amount of compounding periods.

O

Open Mortgage
A mortgage that the borrower is allowed to pay off, renew, or refinance any time. Interest rates for open mortgages are usually higher that a closed mortgage rate.

Outstanding Balance
The amount still owed to the lender at any given point in time.

P

Period Rate
The interest rate that is charged per compounding period.

Portable Mortgage
A mortgage loan than can be transferred from one home, to another when you move.

Possession Date
The date which the buyer is entitled to possession of the property.

Prepayment
Fully or partially paying off the outstanding balance of a loan any time earlier than set out in the contract.

Prime Rate
The interest rate that a lender would charge it’s most credit-worthy customers.

Principal
The portion of the original amount borrowed that still has to be paid back.

R

Refinancing
Mortgage refinancing is replacing your existing mortgage loan with a new one, usually with a new lender.

Renewal
A mortgage renewal is a new agreement to extend or “renew” your existing mortgage terms with your lender.

T

Term
The amount of time you are under contract with a certain lender.

Total Debt Service Ratio
Also known as TDS. The percentage of a borrower’s income that goes towards all debts. (GDS plus things like auto payments, credit card bills etc. ).

V

Variable Rate
An interest rate that changes with the prime rate. Usually expressed as an amount plus or minus prime rate. Also known as a floating rate.

Vendor Take-Back Mortgage
Where the seller of a property becomes the mortgagee (instead of a financial institution).

#

50/50 Mortgage
Also known as a hybrid mortgage. Combines features of a fixed rate mortgage with those of a variable rate mortgage.

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