When you’re in the market for a mortgage there are so many different things to consider. When chatting with your Mortgage Broker about them it may seem as if they are speaking Greek. We wanted to help break the terms into simple definitions for you.
Mortgage: A loan agreement secured by a property.
Conventional Mortgage: A mortgage up to 80% of the purchase price or value of the property.
High-Ratio Mortgage: A mortgage that exceeds 80% of the purchase price or value of the property. This type of mortgage must be insured.
Loan to Value Ratio (LTV): The percentage of the value of the property for which the mortgage is required. This ratio is important in determining if mortgage insurance is required. For example: Property value is $200,000, the down payment available is $25,000 so a required mortgage of $175,000. The LTV is $175,000/$200,000 or 87.5%.
Mortgage Insurance: If your mortgage exceeds 80% of the purchase price or value of the property, the mortgage will have to be insured by one of the three insurance companies – CMHC, Genworth Financial or Canada Guaranty. This fee is calculated as a percentage of your mortgage and is a one time fee that is added into your mortgage amount. This insurance is called default insurance and protects the lender from a loss on the mortgage if the borrower were to default.
Amortization: The number of years it takes to repay the entire amount of the mortgage.
Term: The period of time which your interest rate is guaranteed to you. Terms range from 6 months to 10 years.
Fixed Rate: A mortgage rate that is fixed for a specific amount of time.
Variable Rate: A mortgage rate that fluctuates based on changes in prime rate.
Open Mortgage: A mortgage that can be repaid at any time during the term without penalty. For this convenience, the interest rate is usually slightly higher than a closed mortgage. A good option if you are planning on selling your property or pay off your mortgage entirely.
Closed Mortgage: A mortgage with pre-agreed repayment terms. Paying out this mortgage early may cause you to have a penalty however you usually receive a lower rate taking a closed term.
Portable Mortgage: An existing mortgage that can be transferred to a new property. Great option to avoid paying penalties however you do need to re-qualify with your existing lender to port the mortgage.
Assumable Mortgage: A mortgage which a qualified buyer can take over from the current owner of a property upon its sale. This helps avoid penalties for the existing mortgage holder and if the existing mortgage rate is lower than present rates it’s in the buyers favor to assume.
Total Debt Service (TDS) Ratio: Determines a borrowers capacity to repay a mortgage. It takes into account mortgage payments, property taxes, heat and any strata or maintenance fees plus any other monthly financial obligations you may have (loans, credit card debt, line of credit debt, child support, etc.) and this sum is then divided by the gross income of the applicants. To obtain an insured mortgage your max TDS allowed is 44% with a 680+ credit score and 42% below.
Gross Debt Service (GDS) Ratio: Determines a borrowers capacity to repay a mortgage. This ratio is based only on housing expenses. It takes into account the monthly mortgage payments, property taxes, heating costs and any strata fees or maintenance fees and then this sum is divided by the gross income of the applicants.
Title Insurance: Protects from fraud as well as covers the lenders requirement for a site survey or well water test.
Interest Adjustment Date: The date on which the mortgage term will begin and interest starts accruing.
Closing Date: The legal completion of a transaction, involving either a house purchase or/and a mortgage registration.
Prepayment Penalty: A fee charged by the lender for early repayment to a mortgage over and above the amount agreed upon. The penalty can vary lender to lender, a usual charge is the greater of the interest rate differential or 3 months interest.
Interest Rate Differential (IRD): A penalty for early repayment of all or part of a mortgage outside the normal prepayment terms. This is calculated different depending on lenders. A general way to calculate it is – the difference between the existing rate and the rate remaining for the term, multiplied by the principle outstanding and the balance of the term.
This is just the tip of the iceberg for mortgage terms. If you ever are unsure of anything remember to ask questions. Having an annual mortgage check up helps you stay on top of whether you have the best mortgage to suit your needs. Talking to a Mortgage Broker also helps provide you with knowledge and unbiased advice.