Mortgage Glossary
A bridge loan is a type of short-term loan. The purpose of this program is to assist homeowners in bridging the gap between selling their current home and purchasing a new home when the closing of the sale is later than the closing of the purchase. Typically, this loan is only obtainable if the borrower has a signed and unconditional sale offer on their current home.
A cash-back mortgage provides the borrower with a portion of the mortgage amount as cash in addition to the principal. Funds are available to cover expenses such as land transfer tax, lawyer’s fees, moving costs or new furniture for your house.
A closed mortgage is a specific type of home loan with certain restrictions and limits on paying it off early. The borrower is obligated to make regular payments according to a predetermined schedule and is not allowed to fully pay off the mortgage or make significant extra payments without facing penalties. Closed mortgages often have lower interest rates than open mortgages because they offer more stability and reduce the risk for the lender.
Closing costs are expenses arising during a property’s purchase or sale. As the purchaser, the closing costs you are responsible for include the property transfer tax, legal fees, and any expenses your lawyer may incur on your behalf, such as title insurance, survey costs, courier charges, and others. When getting a mortgage, the lenders expect you to show 1.5% – 4% of the purchase price on top of the down payment amount.
A collateral charge is a type of mortgage where the lender registers a charge against your property for an amount higher than the actual mortgage loan. This means the lender can secure additional funds beyond the initial mortgage amount, up to the specified limit, without requiring you to refinance your mortgage. The benefit of a collateral charge is that it provides flexibility for future borrowing.
A down payment is an initial payment made towards the purchase of a property, which includes the deposit and a portion of the purchase price.
The minimum down payment in Canada is 5% for the property up to $500,000. For properties valued between $500,001 and $999,999, the purchase price is subject to a 5% for the first $500,000 and a 10% for any amount above $500,000.
When the down payment is less than 20% of the property value, the mortgage becomes high-ratio and requires the purchase of mortgage default insurance.
Equity means the part of your property that you fully own. In other words, it’s the difference between the market value of your home and the amount you owe on your mortgage. As you make mortgage payments over time, your equity increases.
A first home savings account is a special type of tax-free savings account designed to help people save money specifically for the purchase of their first home.
With a first home savings account, the contributions made to the account are tax-deductible, meaning they can be subtracted from the individual’s taxable income, potentially resulting in a lower tax bill.
The funds saved in the account can be used towards the down payment or other costs associated with buying a first home, and the withdrawals made for the purpose of purchasing a home are not subject to income tax.
A fixed-rate mortgage is a type of mortgage in which the interest rate remains constant throughout the term of the mortgage, resulting in predictable payments and a predetermined amount of principal paid off over the selected term.
Foreclosure is a legal procedure where a mortgage lender seeks to regain the unpaid balance of a loan from a borrower who has ceased making payments by selling the property used as collateral for the loan.
The GDS ratio is an important financial measure used by lenders in Canada when considering mortgage applications. It helps them assess your ability to manage your housing-related expenses based on your income.
To calculate your GDS ratio, lenders take into account your gross monthly income (your income before deductions) and compare it to your monthly housing expenses. These expenses typically include your mortgage principal and interest payments, property taxes, heating costs, and, if applicable, 50% of condo fees.
Gross household income refers to the total income earned by all members of a household before any deductions or taxes are taken out. It includes income from various sources such as employment, self-employment, investments, and other forms of income.
When applying for a mortgage in Canada, lenders consider your gross household income as one of the key factors in determining your borrowing capacity. They use this information to assess your ability to make mortgage payments and manage your financial obligations.
A high-ratio mortgage is a type of mortgage where the loan-to-value (LTV) ratio is greater than 80%. In other words, it’s a mortgage where the down payment is less than 20% of the property’s purchase price. High-ratio mortgages are commonly used by homebuyers who have a smaller down payment or prefer to allocate their funds differently.
When obtaining a high-ratio mortgage, mortgage insurance is generally required by law. Mortgage insurance is there to protect the lender in case the borrower can’t repay the loan. The cost of mortgage insurance is typically added to your mortgage.
A Home Equity Line of Credit (HELOC) is a flexible form of borrowing that allows homeowners to leverage the equity they have built up in their property. It’s a revolving line of credit that is secured by the equity in your home, providing you with a convenient source of funds for various purposes.
The Home Buyers’ Plan (HBP) is a program introduced by the Canadian government to assist first-time homebuyers in purchasing a home. It allows eligible individuals to withdraw funds from their Registered Retirement Savings Plan (RRSP) to use as a down payment, providing a tax-advantaged way to finance a home purchase.
Under the HBP, you can withdraw up to $35,000 from your RRSP if you are the sole applicant, or up to $70,000 if you’re buying the home with a spouse or common-law partner.
The funds withdrawn under the HBP must be repaid into your RRSP over a period of 15 years.
The Interest Adjustment Date (IAD) refers to the date from which interest begins to accrue on the mortgage loan. For example, if your mortgage payments are scheduled to start on the first day of each month, and your mortgage funds are disbursed on July 15th, the IAD would likely be set as August 1st, and the first payment would be September 1st. The Interest Adjustment Date (IAD) for a mortgage is determined based on the terms of the mortgage agreement.
Interest adjustment is a term related to the calculation of interest on your mortgage loan during the period between the funding date and the start of your regular mortgage payments. It typically occurs when your mortgage funds are advanced partway through a month.
The interest adjustment amount is usually due as a lump sum payment at closing.
The Interest Rate Differential (IRD) is a calculation lenders use to determine the penalty for breaking or prepaying a fixed-rate mortgage before the end of its term. It is designed to compensate the lender for the potential loss of interest income due to the early repayment of the mortgage.
When obtaining a mortgage in British Columbia, legal fees and disbursements are expenses associated with the legal work involved in finalizing the mortgage transaction. These costs are typically incurred for the services provided by a lawyer or notary public who handles the legal aspects of the mortgage process on your behalf.
Mortgage Default Insurance, also known as Mortgage Insurance or Mortgage Loan Insurance, is a type of insurance that protects lenders in the event that a borrower defaults on their mortgage payments. It is required for high-ratio mortgages, where the down payment is less than 20% of the property’s purchase price, and provides a layer of security for lenders.
Mortgage Default Insurance protects the lender, not the borrower. It does not provide any direct benefits or coverage to the borrower in case of default.
The maturity date of a mortgage refers to the date when the mortgage term comes to an end. It signifies the completion of the agreed-upon period during which the borrower is committed to the terms and conditions of the mortgage agreement.
It provides an opportunity to reassess your financial goals, explore new options, and ensure that you have a plan in place for the repayment or renewal of your mortgage.
Mortgage assumption refers to the process of transferring an existing mortgage from the original borrower to a new borrower. In this scenario, the new borrower takes over the mortgage, including its terms and conditions, while the original borrower is released from their obligations.
Mortgage assumption can be a viable option for both buyers and sellers in certain circumstances. Buyers may find it beneficial if they can assume a mortgage with favourable terms, while sellers may benefit by transferring their mortgage to a buyer and avoiding any penalties associated with breaking the mortgage.
Mortgage Critical Illness Insurance is a type of insurance coverage that provides financial protection to homeowners if they are diagnosed with a critical illness specified in the policy. It is designed to help cover mortgage-related expenses during a difficult time and provide peace of mind.
Mortgage discharge refers to releasing the mortgage lien from a property once the mortgage loan has been fully repaid. It is the responsibility of the lender, typically a financial institution or mortgage lender, to initiate the mortgage discharge process. They will prepare the necessary documents to release the mortgage lien from the property. The mortgage discharge process may involve some administrative time and paperwork.
It is an important step in completing the mortgage transaction and providing a clear title to the property owner.
Negative amortization occurs when the outstanding balance of a mortgage loan increases over time instead of decreasing. It happens when the monthly mortgage payments are insufficient to cover the interest charges, resulting in unpaid interest added to the principal balance.
Negative amortization mortgages can be risky for borrowers as the outstanding balance increases over time, potentially leading to a larger debt burden.
An open mortgage is a type of mortgage that provides flexibility to borrowers in terms of prepayment options and early repayment without incurring penalties. It allows borrowers to make lump-sum payments or pay off the entire mortgage balance before the end of the mortgage term.
Mortgage payment frequency refers to how often you make payments toward your mortgage loan. It determines the frequency at which you need to make payments, such as monthly, bi-weekly, semi-monthly, weekly, accelerated biweekly and accelerated weekly.
Read more about Payment Frequency on our blog
A portable mortgage is a type of mortgage that allows you to transfer your existing mortgage from one property to another when you sell your current home and purchase a new one. It provides flexibility and convenience, eliminating the need to break your existing mortgage and incur penalties.
The posted rate, also known as the advertised rate or the published rate, is the initial interest rate that a lender publicly displays for a specific mortgage product. It is the rate that is often advertised and used as a reference point for borrowers.
A prepayment charge, also known as a prepayment penalty or a breakage fee, is a fee that may be charged by the lender if you choose to pay off your mortgage, refinance, or make a significant prepayment amount above the allowed limit before the end of the mortgage term.
Property Transfer Tax (PTT) is a provincial tax imposed on the transfer of real estate properties in British Columbia. It is payable by the buyer upon the purchase or acquisition of a property, including those financed through mortgages.
A reverse mortgage is a type of mortgage product that allows homeowners, typically those aged 55 or older, to access the equity in their homes. It is designed to provide homeowners with a source of income or funds by borrowing against the value of their property.
A second mortgage is a type of mortgage that is taken out on a property while a first mortgage is already in place. It is a separate loan that is secured by the same property but with a lower priority compared to the first mortgage.
A stress test is a requirement imposed by the Office of the Superintendent of Financial Institutions (OSFI) in Canada to assess a borrower’s ability to handle potential increases in mortgage interest rates or changes in their financial circumstances.
The qualifying rate for the stress test is either the Bank of Canada’s conventional five-year fixed mortgage rate or the contractual mortgage rate plus 2%, whichever is higher.
Trigger Rate pertains to variable rate mortgages where the payment amount remains fixed despite changes in interest rate, resulting in a shift in the allocation of principal and interest within each payment. The trigger rate refers to the interest rate that causes the regular payment amount to be insufficient to cover the accrued interest for the payment period, leaving no payment amount to reduce the principal.
The Total Debt Service (TDS) ratio is a financial calculation used by lenders to assess borrowers’ ability to manage their total debt obligations, including housing costs, in relation to their gross income. It helps lenders determine whether a borrower can afford the mortgage and other debts.
The title of a property refers to the legal ownership or the legal rights associated with a specific piece of real estate. It is an official document that proves ownership and contains information about the property, such as the legal description, the registered owner(s), and any encumbrances or liens on the property.
With a variable rate mortgage, while the mortgage rate is floating, your mortgage payment is not. When interest rates change, your mortgage payment will typically stay the same. The benefit of this is that it makes it easier from a budgeting standpoint. However, the downside is that unless you voluntarily start paying more, it will take longer to pay off your mortgage and cost you more interest.
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