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Canadian Mortgage Terms Wiki

Wondering what mortgage terms mean? Confused when looking for rates? Types of lenders? This list can help shed some light on the subject. A home is one of the biggest purchases you can make, knowing the terms around lending is a great start, the next best thing is giving me a call!

Table of Contents:

Accelerated Bi-Weekly Payments VS Regular Payments

When you get are mortgage you’ll be able to choose when you want to make the payments. The three most common options are:

  • monthly (one payment a month)
  • semi-monthly (when you get paid on the 1st and 15th of the month)
  • bi-weekly (when you get paid every two weeks) aka: Accelerated Bi-Weekly.

Why does Accelerated Bi-Weekly matter?

If you pay your mortgage semi-monthly that would equal 24 (2 paycheques a month x 12) payments a year. But if you get paid every two weeks you’d be making 26 payments a year. This is called accelerated by-weekly payments and it gets you an extra two payments a year.

By paying every two weeks and adding in an extra two payments a year compared to Semi-monthly, you’ll lower your amortization period thereby paying your mortgage off faster. You’ll also pay less interest on the mortgage. See the hypothetical comparison below:

Monthly Payment (once a month)
Semi-Monthly (1st & 15th)
Accelerated Bi-Weekly (every 2 weeks)
Mortgage Amount
$100,000
$100,000
$100,000
Interest Rate
5.00%
5.00%
5.00%
Amortization Period
25 years
25 years
21.43 years
Mortgage Payment
$581.60
$290.80
$290.80
Interest Paid
$74,481.49
$74,301.97
62,044.18
Savings
$179.52
$12,437.31

Amortization Vs Mortgage Term

AMORTIZATION OF A MORTGAGE
A term used to describe the period of time over which the entire mortgage is to be paid assuming regular payments. Usually 25 or 30 years. First-time buyers typically pick the longest amortization period available. If your down payment is less than 20%, your maximum amortization period is 25 years. If your down payment is greater than 20%, you could have an amortization period of up to 30 years.
How does it work? The longer the amortization period, the lower your principal and interest payments will be, but overall, the amount of interest you’ll pay will be higher. With a shorter amortization period, you’ll make higher principal and interest payments, but you will pay less interest in the end.

MORTGAGE TERM
A mortgage term is the length of time you’re committed to a mortgage rate, lender, and associated conditions.
A mortgage terms can range from 6 months to 10 years, with 5 years being the most common option. Once your term is up, you may be able to renew your mortgage loan with a new term and rate or pay off the remaining principal.

CMHC – Canada Mortgage and Home Corporation

A Crown corporation that administers the National Housing Act for the federal government and encourages the improvement of housing and living conditions for all Canadians. One potential source of mortgage insurance for high-ratio mortgages.

HELOC – Home Equity Line of Credit

A line of credit extended to a homeowner that uses the borrower’s home as collateral. Once a maximum loan balance is established, the homeowner may draw from the line of credit at his or her discretion.

Home ownership can be a great long-term investment strategy. Your mortgage debt goes down, because you make regular payments against both the interest and the principal borrowed. This increases your home’s equity, the difference between what you still owe and the value of your home. A HELOC lets you borrow against this growing equity. If used prudently, a home equity line of credit (HELOC) can help you reach your financial goals. But with a HELOC, you might also be tempted to use your home as an ATM. You need a plan to use this line of credit wisely, and be aware of potential risks. You can delay repaying the principal balance as long as you cover the interest each month. However, this short-term credit advantage can mean a long-term debt problem.

GDS vs. TDS RATIOS

Affordability is one of the biggest factors a lender will consider when you decide to purchase a property and apply for a mortgage.

GDS and TDS are two mortgage formulas that lenders use to determine exactly how much money they are willing to lend you.

GDS – The Gross Debt Service ratio is the percentage of your gross income needed to cover monthly housing costs including mortgage payments, taxes, utilities and condominium fees if applicable. To qualify for a mortgage, the borrower’s GDS ratio should be 32% or below.

TDS – The Total Debt Service ratio is the percentage of your income that is needed to cover all of your debts. Lenders consider each potential borrower’s credit card balances, property taxes and other monthly debt obligations to calculate the ratio of income to debt. To qualify for a mortgage, the borrower’s TDS ratio should be 40% or below.

 

Interest Adjustment

The amount of interest due between the date your mortgage starts and the date the first mortgage payment is calculated from. Sometimes there is a gap between the closing date of your home purchase and the first payment date of your mortgage. Let’s say that the closing date on your new house is August 10th – but your mortgage payments are on the 15th of each month (so your first payment is calculated from August 15th and paid on September 15th). That leaves five days (August 10th to 14th) that aren’t accounted for in your first mortgage payment. You have to make an extra payment to make up for these five days; the payment is generally due on your closing date. You can avoid all this by arranging to make your first mortgage payment exactly one payment period (e.g., one month) after your closing date.

Mortgage Default Insurance

This is required for mortgage loans with less than 20% down. Default insurance protects the lender in case you are unable to fulfill your financial obligations on your mortgage.

Mortgage Lender Types – A, B or Privates

PRIME LENDER “A”
A lender that requires a borrower to have excellent credit, stable/qualified employment, and a verified down payment. This lender typically offers the lowest rates in the market with the most flexible repayment terms.

ALTERNATIVE LENDER “B”
A lender that allows for blemished credit and new or not so standard qualified income. This lender generally has higher interest rates than A lenders, and typically shorter mortgage terms.

PRIVATE LENDER
A person and/or entity that lends money in the form of a mortgage. Private lending is typically for borrowers that do not qualify at traditional lending institutions as noted above. Private mortgages generally have higher interest rates, fees and a relatively shorter term.

Mortgage Payment Holiday

A mortgage payment holiday is an agreement you might be able to make with your lender allowing you temporarily to stop or reduce your monthly mortgage repayments. Not all mortgages offer the option of a mortgage payment holiday and it depends on the product’s terms and conditions.

Open Vs Closed Mortgages

An open mortgage is best suited for those who plan to pay off or prepay their mortgage loan without worrying about prepayment charges. It allows you the freedom to put prepayments toward the mortgage loan anytime until it is completely paid off. An open mortgage may have a higher interest rate because of the added prepayment flexibility, and can be converted to any fixed rate term generally longer than your remaining term, at any time, without a prepayment charge.

A closed mortgage provides the option to prepay your mortgage loan each year up to a set percentage, (typically 15-20 percent) of the original principal amount. If you want to pay your mortgage loan off completely before your term ends or prepay more than the set percentage you would be subject to a penalty.

Portable Mortgage

Porting your mortgage means moving it with you when you sell your home and move to a new one. The mortgage is tied to the property, but you and your lender are essentially agreeing to sign it over to a new property. The most obvious reason to port your mortgage is if you have a great interest rate and want to keep it for the duration of your term. A Portable Mortgage allows the borrower to transfer the mortgage balance amount and the terms over to a new property with no cost or penalty. This is a feature added to your mortgage agreement and cannot be added once signed but is often a feature offered by default.

Pre-Approved Mortgage

A pre-approved mortgage lets you know how much you can afford, what your interest rate will be and what your monthly mortgage payments will look like. Getting pre-approved can help you narrow your search down to a specific home type, size or neighbourhood.

Getting pre-approved is not a guarantee of final approval for a mortgage. Once you find the home you want to buy, the property still has to be evaluated to ensure the price and condition of the home are acceptable to your lender.

Prepayment Options

Monthly Extra Percentage / Sum
When a lender allows you to add on a certain amount extra to your mortgage payment every month. This goes straight against the principle and doesn’t incur any interest charges. The amount varies by lender but can be anywhere between 0 – 100% of your monthly payment owed.

Annual Lump Sum
The lender will let you make a once a year lump sum payment against the principle of the mortgage. This is the more common form of prepayments you’ll see on the market. Normally the annual lump sum payment option is limited to 25% of the full amount.

Why would you make a prepayment? – Your amortization period will be lowered / the mortgage is paid off faster and with less interest money to the lender.

Why wouldn’t you make a prepayment? – Your money might be better spent elsewhere, like into an RRSP or TFSA.

Prime Rate

Prime rate, also often referred to as the prime lending rate, is the annual interest rate on which major Canadian financial institutions base their lending rates for variable loans or lines of credit.

Let’s say you apply for a mortgage with your bank and decide on a variable interest rate, the interest rate that you will be offered is based on, or tied to, your bank’s prime rate. It will be expressed as a certain percentage higher or lower than the prime rate. If you have a variable rate and not a fixed rate, if your bank’s prime rate increases or decreases, so will the interest rate of your mortgage.

So where does your bank’s prime rate come from and who decides what it’s going to be? That would be the Bank of Canada (BOA). A bank’s prime rate is based on how much it costs them (and all financial institutions) to borrow money. The cost of borrowing for a bank is determined by the overnight rate (i.e. the key interest rate in Canada) set by the Bank of Canada.

The Bank of Canada sets its overnight rate which dictates how expensive it will be for the major financial institutions in Canada to borrow money. Then those major financial institutions set their own prime rates based on the overnight rate (as a side note, each of the 5 big banks in Canada set their own prime rate but, more often than not, it’s the same). And it’s the prime rate that affects how affordable or unaffordable it will be for you, the consumer, to borrow money. Generally speaking, the overnight rate is an indicator of how well or poorly the economy is functioning.

Simply put, the higher the Bank of Canada sets the overnight rate, the higher a bank’s prime rate will be and the higher the interest rate you’ll be offered when you go to borrow money.

Title Insurance

Insurance against losses or damages that could occur because of anything that affects the title to a property. Title Insurance is issued by a Title Company to insure the lender, but there is also title insurance that protects the borrower against errors in the title of your property.

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