Mortgage Terminology

Accelerated Bi-weekly Payment

A mortgage repayment plan in which the borrower makes 26 payments per year instead of 24 which would be required if the payment plan called for four payments per month. The extra four payments each year have the effect of “accelerating” the repayment of the mortgage.

Amortization

This refers to the process of paying off a mortgage in regular payments composed of both interest and principal.
 This is usually 25 years for a new mortgage, however can be up to a maximum of 35 years.

Appraisal

An independent, unbiased report that uses various analysis techniques and market research to determine the realistic value of a property.

Assumable Mortgage

An existing mortgage that can be taken over (assumed) by the buyer of a property when that property is sold.

Balloon Payment

Any payment of principal over and above the regular payment.

Bank Rate

The rate at which the Bank of Canada charges loans to the chartered banks. This is the rate on which lending institutions base their prime lending rate.

Beacon Score


The name given to the credit score published by Equifax. See also Empirica Score.

Blended Payments

Regular equal mortgage payments combining, or blending, interest and principal components in one constant payment.

Blended Rate

The rate that results from the blending of an existing mortgage and a new mortgage with differing interest rates into one consolidated mortgage. The calculation to determine the final rate takes into account both the interest rates and the amount of principal for each of the component loans.

Bridge Financing


A loan provided to borrowers to provide financing for purchase, pending closing of the sale of their existing property.

Canadian Association of Accredited Mortgage Professionals (CAAMP)


CAAMP is the only national organization representing Canada’s mortgage industry and administers the Accredited Mortgage Professional (AMP) designation.

Canada Mortgage and Housing Corporation (CMHC)


A Crown Corporation, which was initially created to administer the National Housing Act and is Canada’s only public sector mortgage insurer. CMHC is charged with administering government housing initiatives and works with community organizations, the private sector, non-profit agencies and all levels of government to help create innovative solutions to today’s housing challenges.

Conventional Mortgage

A loan based on the credit of the borrower and on the collateral for the mortgage. A conventional mortgage does not exceed 80% of the market value of the property. This means that the borrower must have 20% or more available for the down payment.

Convertible Rate

Mortgages with a convertible rate feature allow borrowers to fix the rate of their variable rate mortgage at any time with no penalty.

Credit Score


A single number that represents the information found in a borrower’s credit history. Equifax’s credit score is known as the Beacon Score, while TransUnion’s score is called the Empirica Score.

Debt Service Ratios


Ratios that are used to compare borrowers’ debts to their incomes to determine if they can afford loans

Double Up Option

A clause that may be included as part of an open mortgage contract, giving the borrower the opportunity to double the scheduled principal and interest payments.

Down Payment

The initial amount you put towards your purchase price.

Fixed Rate Mortgage

In a fixed rate mortgage the interest is determined and is set for the term of the mortgage. Fixed rate mortgages are most desirable when current interest rates are low.

Fully Open Mortgage

An open mortgage that allows principal payments to be made in any amount, at any time, in addition to regular mortgage payment, without penalty.

Gross Debt Service Ratio (GDS)

The percentage of the borrower’s income that is needed to make all payments for costs associated with housing. There is a maximum amount associated with this ratio to ensure that borrowers can afford to carry the debt.

High Ratio Mortgage

A mortgage is considered high ratio when the loan-to-value is 80% or more. This occurs when the borrower’s down payment is less than 20%of the property value.

Home inspection

An examination of the structure and mechanical systems to determine a home’s safety and makes the potential homebuyer aware of any repairs that may be needed.

Interest Rate

Interest rate is the percentage charged on outstanding loan balances.

Interest Rate Differential Amount (IRD)

A compensation charge that may apply if you pay off your mortgage principal prior to the maturity date, or pay the mortgage principal down beyond the amount of your prepayment privileges.  The IDR is calculated on the amount being prepaid using an interest rate equal to the difference between your existing mortgage interest rate and the interest rate that can now be charged when re-lending the funds for the remaining term.  Most closed fixed-rate mortgage have a prepayment penalty that is the higher of 3-months interest or the IDR. Most variable-rate mortgages do not have IRD penalties.

Land or Property Transfer Tax

A tax paid on property that changes hands. First-time buyers may be eligible for a rebate in certain provinces. Calculated by 1% on the first $200,000 of fair market value and 2% on the portion greater than $200,000.

Legal Fees

The cost paid to have a lawyer finalize the property transfer between the seller and the purchaser.

Loan-to-Value Ratio (LTV)

The amount of the mortgage loan compared to the value of the property. This ratio is calculated by the lender prior to providing the loan. The results of this calculation help to determine whether or not the applicant will qualify for a loan and whether the application, if approved, will be for a conventional loan or a high ratio loan.

Lump Sum Payment Option

A clause that may be included in an open mortgage allowing the borrower to prepay a portion of the principal if desired and in accordance with the specific terms of the contract.

Maturity Date

The final day of the term of the mortgage, on which the balance of the mortgage owing becomes due.

Mortgage


A legal method by which a borrower can pledge property to a lender as security for a debt. In Quebec, this is referred to as a hypothec.

Mortgage Broker

A mortgage broker acts as an intermediary who brokers mortgage loan on behalf of individuals or businesses.

Mortgage Loan Insurance (Mortgage Default Insurance)

Mortgage loan insurance enables home buyers to purchase a home with as little as 5% down payment. The amount of the insurance premium depends on the amount borrowed from the lender and ranges from .50% to 7% of the home purchase price less down payment. Most commonly an insurnance premium of 2.75% is required.

Mortgage Refinancing

The replacement of current mortgage financing with new financing, usually to take advantage of different interest rate or financial conditions or the existing equity in the property.

Mortgage Term

The length of time the interest rate is guaranteed for a mortgage. Mortgage terms normally range from 6 months to 5 years or more, after which time the borrower can either repay the balance of the principal owing or re-negotiate the mortgage at current rates.

Nominal Interest Rate

Also known as the stated rate. This is the interest rate used to calculate interest payments. It differs from the effective interest rate.

Open Mortgage

An open mortgage allows a borrower to repay any amount of the principal at any time without notice or penalty. Mortgages may be partially open, having clauses that allow partial pre-payment at specified times, or in specified ways. For example,

  • Double Up Option 
The opportunity to double the scheduled principal and interest payments.
  • Lump Sum payment Option 
The choice to prepay a portion of the principal.
  • No Cost Switching of Payment Option 
This option allows the borrower to change the payment schedule (monthly/semi-monthly/bi-weekly/weekly).
  • Skip Payment Option 
This alternative grants the borrower the ability to skip a monthly payment without the mortgage going into default.

Portable Mortgage

A mortgage with an option that allows a buyer to transfer a current mortgage to a new property (typically subject to credit approval and a property appraisal).

Prepayment Penalty

The sum of money (usually equal to an amount of interest) a lender may require from a borrower to repay all or part of any outstanding principal in advance.

Prime Rate

The interest rate at which financial institutions lend to their best customers.

Principal

The amount upon which interest is paid.

Reverse Mortgage

This type of mortgage allows older consumers to convert their home equity into monthly cash payment(s), generally for living expenses. A homeowner’s equity is gradually drawn down by a series of monthly payments from the lender to the homeowner – the borrower. At the end of the loan period, or upon the death of the borrower, the loan balance is due, which is usually settled by the heirs who sell the property to meet the outstanding obligation.

Second Mortgage

A mortgage placed on real property which is already encumbered with one mortgage. Determination of first, second, third mortgage, etc. is determined by priority of registration (time and date).

Skip Payment Option

This is an example of a mortgage clause that may be added to an open mortgage. If this clause is part of the mortgage agreement, the borrower has the ability to skip a monthly payment without the mortgage going into default.

Submortgage Broker

The term used in British Columbia to describe a licensed individual employed by a broker and working as a mortgage originator.

Term

In a mortgage, term is the actual length of time for which the money is loaned. The term is usually shorter than the amortization period. At the end of the term the outstanding debt must either be refinanced at current market rates or paid off in full.

Title Insurance Policy

A contract by which the insurer, usually a title insurance company, agrees to pay the insured a specific amount for any loss caused by insured defects to title of a property, for which the insured has an interest as purchaser, lender or otherwise.

Total Debt Service Ratio (TDS)

One of the ratios used to determine whether or not a borrower is able to carry the debt load for a mortgage. The ratio is calculated as the percentage of annual income required to cover housing costs (GDS) plus any other loans that an individual has, such as those resulting in credit card and car payments. There is a maximum amount associated with this ratio to ensure that borrowers can afford to carry the debt.

Underwriting

This is the process undertaken by lenders and insurers to verify the mortgage application information and supporting documentation submitted, make an assessment of risk on both the applicant(s) and the property, and approve or decline the mortgage loan.

Variable Rate Mortgage

Is type of mortgage, also referred to as adjustable rate mortgage, is the opposite of a fixed rate mortgage. The interest rate on this loan may change during the term of the mortgage reflecting changes in the current market rates.

Vendor Take-Back Mortgage (or Seller Take-Back Mortgage)

A mortgage in which the vendor uses his or her own equity to provide some or all of the mortgage financing in order to sell the property.

For more information about mortgage terminology, please email me directly at: paul@paulhudsonmortgages.ca