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Mortgage Terminology
Glossary of common mortgage terms to help you better understand the process
Glossary of Mortgage Terms
AMORTIZATION PERIOD: The actual number of years it will take to completely pay back your mortgage loan.
APPRAISED VALUE: An estimate of the value of the property. Usually conducted for the purpose of mortgage lending by a certified appraiser. This appraisal is not to be confused with a building inspection.
ASSUMABILITY: A lending condition that allows a buyer to take over (or assume) a seller's mortgage on the property.
CLOSED MORTGAGE: A mortgage that locks the borrower into a specific and set payment schedule. A penalty usually applies if the loan is repaid in full before the end of the term.
CONVENTIONAL MORTGAGE: A mortgage loan issued for up to 75% of the property's appraised value or purchase price, whichever is less. This type of mortgage does not require mortgage insurance.
DOWN PAYMENT: The buyer's "cash" payment toward the property, usually the difference between the purchase price and the amount of the mortgage loan.
EQUITY: The difference between a home's selling value and the debts against it. A $200,000 home with a $150,000 outstanding mortgage would be said to have an equity of $50,000.
GROSS DEBT SERVICE RATIO (GDS): A ratio based on income in relation to mortgage payments that is used by a lender to qualify a prospective buyer for a mortgage. This differs from the TDS (below) in that it does not include other debt, such as credit cards.
HIGH-RATIO MORTGAGE: A mortgage that exceeds 75% of the home's appraised value. These types of mortgages must be insured against default, unlike conventional mortgages, above. Examples of high-ratio mortgage insurers are: Canada Mortgage and Housing Corporation (CMHC) and GE Capital Mortgage Insurance (GEMI).
INTEREST RATE: The amount charged by the lender for the use of the lender's money, expressed as a percentage. There are many ways interest can be charged and other ways in which it may be stated. It would be best to discuss the variables of interest with your lending insitution for their specific details.
MATURITY DATE: The end of the mortgage term, at which time the mortgage can be paid in full, or the loan renewed for another term.
MORTGAGEE: The entity or financial institution that lends the money for the mortgage.
MORTGAGE INSURANCE: Applies only to high-ratio mortgages (see above). It's purpose is to protect the lender (mortgagee) against loss if the borrower (mortgagor) is unable to make payments or repay the mortgage.
MORTGAGE LIFE INSURANCE: This form of insurance is to protect the mortgagor by paying off the entire mortgage if the borrower dies. In the case of two borrowers, if one dies, the mortgage is paid and title reverts to the surviving borrower.
MORTGAGOR: The borrower of the loan/mortgage.
OPEN MORTGAGE: Allows for partial or full payment of the mortgage principal at any time, without any penalties.
PORTABILITY: A mortgage option that enables borrowers to take their current mortgage with them to another property, without penalty. Make sure to read the fine print of your own mortgage terms to check for conditions (some mortgages can be "ported" only within a 3 month period of time from the closing date of the home you are selling to the closing date of the home you are buying, for example). Pay careful attention to these conditions if you are buying a newly constructed home and may be facing closing delays.
PRE-APPROVED MORTGAGE: You can be preapproved for a mortgage before you find the house you want to buy. Preapproval means that income and credit meet the underwriting guidelines for the loan chosen. This approval is typically in writing and contains any necessary conditions to provide the final approval. Conditions (or stipulations) must be completed before your loan can be funded. This is the best way to find out exactly how much house you can afford - I strongly suggest this to any buyers, especially first time buyers.
PREPAYMENT PRIVILEGES: Mortgage conditions that allow for voluntary payments in addition to regular mortgage payments. Some mortgages allow these at any time during the mortgage term (up to a certain percentage of the principal) and some only allow prepayment on an "anniversary date" (the day of the year when the mortgage began).
PRINCIPAL: The total amount borrowed or still outstanding on a mortgage loan.
REFINANCING: Paying off the existing mortgage and arranging a new one, or re-negotiating the terms and conditions of an existing mortgage. Make sure, if getting out of a mortgage before the end of the term at one bank and planning to refinance at another bank or lending institution, to check the conditions BEFORE discharging because some mortgagees have serious additional charges (that can amount to tens of thousands of dollars) that apply if moving to another bank.
RENEWAL: Re-negotiation of a mortgage loan at the end of a term for a new term.
SECOND MORTGAGE: Additional financing, usually has a shorter term and higher interest rate than a first mortgage.
TERM: The length of time an interest rate applies to a loan. It also indicates when the principal balance becomes due and payable to the lender.
TOTAL DEBT SERVICE RATIO (TDS): The ratio of annual (or monthly) mortgage charges for principal, interest and taxes, plus payments on other debts (such as bank loans and credit cards), compared with gross income of the borrower. This differs from the GDS in that the TDS includes debt other than the mortgage.
VARIABLE-RATE MORTGAGE: A mortgage with fixed payments, but a fluctuating interest rate (usually following the movements of the Bank of Canada "Prime" rate). The changing interest rate determines how much of the payment goes towards the principal.
VENDOR/SELLER TAKE-BACK MORTGAGE: When the seller provides some or all of the mortgage financing in order to sell their property. Also applicable in new construction, where the builder holds a mortgage on the development until all units are sold, so that initial owners might make payments to the builder until they discharge their mortgage.