Mortgage Glossary

We’ve put together this mortgage glossary of common mortgage and home buying terms to help you better understand the process of buying a home.

Different Types of Mortgages

Closed Mortgage

A closed mortgage is usually required to remain unchanged until the end of the agreed upon term. Changes can then be made upon the renewal of the mortgage. This type of mortgage typically carries fees for pre-paying or refinancing before the end of the current term.

Convertible Mortgage

A convertible mortgage provides borrowers with the security of a closed mortgage because it can be converted into a closed mortgage with a longer term at any time, with no associated fees.

High-Ratio Mortgage

A High-Ratio mortgage is a mortgage you secure when you are only able to provide a down payment of less than 20% of the total purchase value of the home. It is now required for this type of mortgage to be insured.

Open Mortgage

An open mortgage can be repaid, either in part or in full, at any time throughout the term of the loan, with no associated fees.

Different Types of Rates

Fixed Rate

A fixed rate is an interest rate that remains constant throughout the entire length of the mortgage loan.

Variable Rate

A variable rate is an interest rate that has the potential to fluctuate according to changes in the current market and the prevailing rate in the market at any given time.

Mortgage Rate

The mortgage rate refers to the percentage of interest that you will be required to pay on top of your monthly principal payment.

Costs Associated with Closing

Closing Costs

Closing costs are fees that a purchaser must pay in addition to the cost to purchase the property itself. These costs can include fees for legal services and disbursements and are to be paid at closing.

Appraisal

An appraisal is performed to determine the value of a property and is paid for by the borrower. This lending value is then used by the lender for your mortgage.

Interest Adjustment

This adjustment is made when your closing and first mortgage payment are not on the same day. When these dates differ, an interest adjustment is calculated to determine the gap between these payments. The interest adjustment is usually due at closing.

Land Transfer Tax

A land transfer tax is a tax that can be imposed on property that is transferred from one owner to another. This tax will vary based on location and is not applicable in some provinces.

Pre-Paid Property Tax and Utility Adjustments

These adjustments refer to the amount you will owe in regards to property taxes and utilities if the previous home owner has prepaid some of the bills. If they have prepaid, the amount you are required to reimburse them will be calculated at closing.

Property Survey

A property survey will provide you with a legal report of your property. This will include its location and dimensions. Your mortgage lender will usually require an updated property survey.

Sales Tax

Sales taxes are taxes that get applied to the purchase cost of a certain property. Make sure you discuss sales taxes before signing an offer because these amounts will vary by location.

Additional Mortgage Terms and Phrases

Amortization

Amortization refers to the actual length of time, in a number of years, it should take you to pay off your mortgage in its entirety.

Assuming a Mortgage

When you assume a mortgage, you take over the mortgage obligations of the previous owner of the property you are purchasing.

Buy Down Rate

A buy down rate refers to the interest rate percentage you are willing to add on to your future mortgage in order to save a potential buyer money on their mortgage and add an incentive to purchase your home. The actual buy down rate is the portion of the interest rate on the buyer’s mortgage that you agree to accept when they purchase your home. This rate, up to a maximum of 3 percent, will be placed on your mortgage in addition to your own interest rate.

Home Insurance

Home insurance, also commonly known as property insurance, covers your entire property, which includes both your home as well as the contents inside.

Inspection

An inspection can only be performed by a qualified professional who will notify all parties of any potential property repairs and what they are estimated to cost.

Lump Sum Payment

A lump sum payment is a large, extra payment that can be made to lessen the amount of your mortgage principal that remains outstanding. These payments may have costs associated with them, depending on what type of mortgage you have.

Mortgage

A mortgage is a loan taken out in order to purchase a property. The property itself is considered the collateral for the loan.

Mortgage Life Insurance

Mortgage life insurance is designed to protect your dependants and loved ones in the unfortunate instance that you die or become permanently disabled. Your mortgage life insurance will pay off the remaining balance of your mortgage loan if you die, so the burden is not left on your family.

Pre-Approved Mortgage Certificate

A written agreement that you will get a mortgage for a set amount of money at a set interest rate. Getting a pre-approved mortgage allows you to shop for a home without worrying how you’ll pay for it.

Offer to Purchase

A legally binding agreement between you and the person who owns the house you want to buy. It includes the price you are offering, what you expect to be included with the house, and the financial conditions of sale (your financing arrangements, the closing date, etc.).

Porting

Transferring an existing mortgage from one home to a new home when you move. This is known as a “portable” mortgage.

Pre-payment

Repaying part of your mortgage ahead of schedule. Depending on your mortgage agreement, there may be a prepayment cost for pre-paying.

Refinancing

The process of paying out the existing mortgage for purposes of establishing a new mortgage on the same property under new terms and conditions. This is usually done when a client requires additional funds. The client may be subject to a pre-payment cost.

Renewal

Once the original term of your mortgage expires, you have the option of renewing it with the original lender or paying off all of the balance outstanding.

Term

The length of time during which you pay a specific rate on the mortgage loan (i.e., the number of years in your mortgage contract). This is different than the amortization period. A mortgage is usually amortized over 20-25 years, with a shorter term (typically 6 months to 5 years). After the term expires, the interest rate is usually renegotiated with the lender (your bank, for example).

The CMHC is another great source of mortgage information, especially for high-ratio mortgages.

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