The mortgage process can be overwhelming. Knowing key mortgage and home buying terms can help reduce confusion and assist you in better understanding the process of buying a home.
Debt Service Ratios
Gross Debt Service Ratio (GDS)
It is one of the mathematical calculations used by lenders to determine a borrower’s capacity to repay a mortgage. A GDS ratio is the percentage of your income needed to pay all of your monthly housing costs, including principal, interest, taxes, and heat (PITH). You will also need to include 50 per cent of your condo fees, if applicable.
Total Debt Service (TDS) Ratio
The percentage of the borrower's income that is needed to cover housing costs (GDS) plus any other monthly obligations that an individual has, such as credit card payments and car payments.
The maximum percentage of your income that can be allocated to your mortgage and other debts.
Supported by all lenders. 32/40 means that the maximum amount of your income to be used for the mortgage is 32%, where 40% of your income can be used for the mortgage and all other debt combined.
Supported by most lenders. 35/42 means that the maximum amount of your income to be used for the mortgage is 35%, where 42% of your income can be used for the mortgage and all other debt combined.
Offered by some lenders, you must have great credit and meet certain criteria to qualify. 39/44 means that the maximum amount of your income to be used for the mortgage is 39%, where 44% of your income can be used for the mortgage and all other debt combined.
Types of Interest Rates
- Fixed rate - The rate does not change for the term of the mortgage.
- Variable rate - The interest rate fluctuates with market rates.
Open and Closed Mortgages
- Open mortgage - Lets you pay off your mortgage in full or in part at any time without any penalties.
- Closed mortgage - Offers limited (or no) options to pay off your mortgage early in full or in part, but it usually has a lower interest rate.
Conventional and High-Ratio Mortgages
- Conventional mortgage - A loan that is equal to or less than 80% of the lending value of a home. This requires a down payment of at least 20%.
- High ratio mortgage - A loan that is over 80% of the lending value of a home. This means the down payment is less than 20% and will likely require mortgage loan insurance.
Accelerated Bi-Weekly Mortgage Payment
When your monthly mortgage payment is divided by two and the amount is withdrawn from your bank account every two weeks. In total, you make 26 payments per year, but the payment amount is slightly higher than a regular bi-weekly mortgage payment.
Accelerated Weekly Mortgage Payment
When your monthly mortgage payment is divided by four and the amount is withdrawn from your bank account every week. In total, you make 52 payments per year, but the payment amount is slightly higher than a regular weekly mortgage payment.
Agreement of Purchase and Sale
The contract between the buyer and the seller of a home. The agreement of purchase and sale outlines the terms and conditions both the buyer and seller promise to abide by when the property is sold, including the purchase price, property features included in the price, closing date and more.
The length of time you agree to take to pay off your mortgage (usually 25 years).
The valuation of a property used to determine the market value. There are a number of times you may choose to get a home appraisal, including: when you are buying a home, selling a home, refinancing, taking out equity, and even when you’re appealing a property tax assessment.
A mortgage that can be transferred from the seller to the buyer. When assuming a mortgage, the buyer also needs to pay the seller the difference between their purchase price and what’s leftover on the mortgage.
Bank of Canada
Canada’s central bank. The Bank of Canada was founded in 1934 and became a Crown Corporation in 1938. It serves to promote the economic and financial well-being of Canada and is responsible for setting the overnight lending rate and determining monetary policy.
A unit of measure for 1/100th of a percent (0.01%). For example, if you heard that interest rates increased by 30 basis points, it means they went up by 0.30%.
Bi-Weekly Mortgage Payment
When your monthly mortgage payment is multiplied by 12 months and divided by the 26 pay periods in a year. The amount is withdrawn from your bank account every two weeks, so you make 26 payments per year.
When you combine the mortgage rate from an existing mortgage with the mortgage rate from a new mortgage and blend them into a new rate somewhere in-between the two. You would get a blended mortgage to avoid breaking your mortgage early – to access equity and/or obtain a lower mortgage rate – and having to pay the prepayment penalty required to do so.
A short-term loan, typically taken out for a period of 2 weeks to 3 years pending the arrangement of larger or longer-term financing. You would need bridge financing if you were stuck in a situation where the closing date for the home you’re purchasing is before the closing date of the home you’re selling, leaving you without a down payment for the new home because it’s tied up in equity.
Carrying Costs (or Monthly Carrying Costs)
The extra costs you have to pay each month as a homeowner, over and above your mortgage payment. Common carrying costs include property taxes, condo fees, home insurance, utilities, and telecommunication services.
The legal and administrative costs associated with any real estate transaction. Whether you’re buying, selling or refinancing, your closing costs may include any of the following: a home inspection, deposit, down payment, land transfer tax, title insurance, legal fees, GST/HST, any prepaid property taxes or utilities, a prepayment penalty and more.
The date of a real estate transaction typically set to occur several weeks after an Offer to Purchase is accepted. On closing day, real estate lawyers ensure funds are moved to ensure the seller is paid and the buyer’s mortgage is taken out. As well, all closing costs are paid, ownership of the property is transferred, and the buyer can pick up the keys to their new home.
A re-advanceable mortgage product that allows your lender to lend you more money as your property value increases, without having to refinance your mortgage. One important thing to consider about collateral mortgages, however, is they cannot be transferred to another lender – not even at the end of your mortgage term.
A mortgage that allows you to change the type of mortgage you have – either between fixed and variable rates, or from a shorter term to a longer term – before your term is up, without penalty. It is important to note that not all lenders offer convertible mortgages.
A number between 300 and 900 that is used by lenders to determine whether or not you can afford to repay any money they potentially lend you. The higher your number is, the better your chances are of being able to borrow money – and at a low interest rate.
When you fail to make your monthly mortgage payments, you can eventually default on the loan, which means you failed to meet the legal obligations in your mortgage contract.
When you write up an Offer to Purchase with your real estate agent, they will request a deposit on the seller’s behalf. A deposit, which is typically 1% of the purchase price, proves to the seller that you are serious about buying their home.
The amount of money that you put towards the purchase of a home.
Early Mortgage Renewal
If you still have an outstanding balance on your mortgage at the end of your term, you have to renew for another term. Most lenders allow you to renew and stay with them anytime in the final 120 days of your current mortgage term; this is known as an early mortgage renewal.
The mortgage in first position on the property that was used to secure your mortgage loan. If you ever defaulted on your loan, the lender in first position would be repaid before any other lenders you had used your home as security in order to borrow money from.
First-Time Home Buyers’ Tax Credit (HBTC)
A $750 rebate for qualifying first-time homebuyers in Canada. To receive your $750 rebate, you must claim it with your personal income tax return.
An individual's total personal income before taxes and deductions.
GST/HST (on a New Home Purchase)
If you buy or build a new home, you will have to pay GST or HST on the purchase price, depending on which province you live in.
Home Buyers’ Plan (HBP)
The Canadian government's Home Buyers' Plan (HBP) allows you to borrow up to $35,000 from your RRSP, tax-free, to help you purchase a home. Note that this is considered a loan and you must repay it within 15 years.
The value of ownership you have built up in your home. To determine how much equity is in your home, take the current market value and subtract the balance of your mortgage loan.
Home Equity Line of Credit (HELOC)
A home equity line of credit (HELOC) is a revolving line of credit secured by your home that offers a lower interest rate than a traditional line of credit. Through a HELOC, you can borrow up to 65% of the value of your home minus the outstanding balance of your mortgage. Note, however, that your mortgage balance + HELOC cannot equal more than 80% of the value of your home (meaning you must maintain 20% equity at all times).
A visual inspection of both the interior and exterior of your home. The report that follows will tell you whether or not everything is up to code, as well as when certain features of your home may need to be fixed or replaced. Most buyers include the successful completion of a home inspection as one condition in their Offer to Purchase.
Typically expressed as an annual percentage rate, interest is the charge you have to pay in order to borrow money.
Interest Adjustment Date
The date by which you must pay your interest adjustment, which is any interest accrued between your closing date and the date your first scheduled mortgage payment comes out.
Land Transfer Tax
A tax that is charged for the transfer of property from one homeowner to another. All provinces have a land transfer tax, except Alberta and Saskatchewan, who instead levy a much smaller transfer fee. In most provinces, land transfer tax is calculated as a percentage of the property value. Homebuyers in Toronto, unfortunately, have to pay an additional municipal land transfer tax, on top of the provincial land transfer tax.
Land Transfer Tax Rebate
To help offset the cost of land transfer tax, Ontario, British Columbia, Prince Edward Island, and the City of Toronto offer land transfer tax rebates to first-time homebuyers.
Lender / Provider
The financial institution that lends you money to purchase a home.
A lien is basically a notice attached to the title of your property that says you owe some creditors money. Your mortgage is one example of a property lien. Letting your property taxes or utilities go into arrear are two other examples. In order to sell your home and transfer the title to a new homeowner, you need to repay those debts and clear the title of any liens against your property.
Loan-to-Value Ratio (LTV)
A term used to express the ratio of your mortgage loan compared to the value of the property. For example, if you borrow $300,000 to purchase a $350,000 home, your LTV ratio is $300,000 / $350,000 or 86%. To make up the full 100%, you would have to make a 14% (100% – 86%) down payment, which in this case would be $50,000. The higher your LTV ratio is, the riskier your loan is for the lender.
Lump Sum Payment
A one-time payment for the total or partial value of your outstanding mortgage balance.
Market Value (or Assessed Value)
The price your home could sell for in the current marketplace. An appraisal must be done, in order to determine the market value of your home.
The last day of your current mortgage term.
Monthly Mortgage Payment
When your mortgage payment is withdrawn from your bank account on the same day of each month (i.e. on the 1st), so you make 12 payments per year.
The loan you borrow from a lender, in order to purchase a home.
The document you submit to the lender, in order to be approved for a mortgage loan. A mortgage application will include information about the property, as well as the financial and background information about the borrower(s). Mortgage underwriters use the information to determine how much money they will lend to the borrower(s), for how long and at what interest rate.
Not to be confused with a mortgage pre-approval, a mortgage approval comes after you have submitted an Offer to Purchase, the seller has accepted, and you want to secure financing to purchase the home. At this stage, you submit your completed mortgage application and wait to find out if it has been approved.
A licensed mortgage specialist who has access to multiple lenders and mortgage rates. A mortgage broker can find the right mortgage product for you, negotiate a better rate on your behalf and pass on volume discounts to you.
Mortgage Default Insurance
Commonly known as CMHC insurance, mortgage default insurance is a mandatory type of insurance that Canadians have to purchase if they cannot make a down payment of 20% or more. Mortgage default insurance protects your lender in case you ever defaulted on your mortgage loan.
Mortgage Pre Approval
This is a process where a lender is actually checking your credit and verifying your financial information. If you are pre-approved, a lender is making an actual commitment (subject to conditions such as a property valuation) to loan you money. A Pre-approval is not necessarily a guarantee that you will receive a specific rate or mortgage from that lender because circumstances may change from the time you get pre-approved until the time you are ready to make a purchase.
Mortgage Pre Qualification
This is generally a quick, simple process. You provide a mortgage lender personal financial information, including your income, debt, and assets. Based on your unconfirmed information, the lender will give you a tentative assessment as to how much they would be willing to lend you toward a home purchase. Also, a Pre-qualification can usually be done over the phone or online. A pre-qualification is not a guaranteed loan.
The interest rate changed by the lender you borrow money from to purchase a home.
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.
The length of time that the options and interest rate you choose are in effect. When the term is up, you can renegotiate your mortgage and choose the same or different options.
New to Canada Mortgage
The mortgage financing process that those who are new to Canada must undergo, which includes having to submit extra supporting documentation than permanent residents, and potentially needing to use one of the mortgage default insurance providers’ New to Canada mortgage programs.
Offer to Purchase
Drafted by the buyer’s real estate agent, this is the initial offer made to the seller. A deposit is usually included with the offer, and if the buyer changes their mind, the seller has the right to keep the deposit.
How often you make your mortgage payments. It can be weekly, bi-weekly, semi-monthly, or monthly.
Your monthly housing costs – mortgage principal + interest, taxes, and heating expenses – used when calculating your debt service ratios and determining your maximum affordability.
An option that lets you transfer or switch your mortgage to another home with little or no penalty when you sell your existing home. Mortgage loan insurance can also be transferred to the new home.
A mortgage that can be ported from one home to another. If you are selling one home and buying a new one, you would want to port your mortgage to the new home if your interest rate was lower than today’s best rate.
The ability to make extra payments, increase your payments or pay off your mortgage early without incurring a penalty.
A fee charged to a borrower by the lender when the borrower prepays all or part of a mortgage over and above the amount agreed upon. The prepayment penalty is usually the greater of the Interest Rate Differential (IRD) or 3 months interest.
Technically, it is the interest rate lenders charge their best customers. When it comes to mortgages, however, you will only hear about Prime rate if you take out a variable rate mortgage term, which is quoted to you as Prime +/- a percentage. If the lender’s Prime rate goes up or down, your mortgage rate and payment will follow.
The amount borrowed or the amount still owed on a loan, separate from interest.
A short-term interest-only loan taken out by someone who does not qualify for traditional lending. Private mortgages are meant to be short-term solutions typically one to three years during which time the borrower only pays off the interest accumulated each month. Interest-only mortgages are appealing because the borrower is not required to pay down the principal amount of the mortgage, therefore reducing the monthly payment. Interest-only payments improve the monthly cash flow, but for obvious reasons they are not a viable long-term solution. At the end of the term, most homeowners transfer their private mortgage to a traditional lender.
Your municipality’s tax rate multiplied by the market value of your property; this amount is due once per year.
Not to be confused with the market value, this is the actual price you paid to purchase a home.
A time period (typically 30-120 days) during which you can lock in the current best mortgage rate. If rates go down during this time, most lenders will honour the lower rate.
Real Estate Agent / Realtor
The professional who will help you find the home you want to buy and/or help you sell your current home.
Real Estate Lawyer
Whether you are buying, selling or refinance, you need to hire a lawyer who can facilitate your entire real estate transaction. A real estate lawyer’s job is to make sure all of your paperwork and transactions are filed accordingly, from reviewing your offers and agreements, to conducting a title search on your home, registering the title in your name and making sure all of your payments are made in-full and on-time.
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.
A mortgage product for homeowners who were mortgage-free but who want to borrow money against the value of their home. Commonly used by seniors, no repayment is required until the home is either sold or the homeowner dies.
An additional loan taken out on a property that is already mortgaged. For the lender, this has more risk than the first mortgage, because they are in second position on the property's title. If the homeowner defaulted on their payments and the property was taken into possession, the lender in first position would always be paid out first, whereas the lender in second position runs the risk of not being repaid. To compensate for this risk, mortgage rates for second mortgages are always higher than for first mortgages.
Self Employed Mortgage
The mortgage financing process those who are self-employed have to go through, which includes submitting personal tax Notices of Assessment with the mortgage application, and potentially even some third-party income validation. There are, however, some lenders who cater to the self-employed and will look at credit history over income generation.
Many lenders give borrowers the option to skip between 1 and 4 monthly mortgage payments each year. If you decide to skip a payment, you would not be making one of your regular mortgage payments (principal + interest). Note that when you skip a payment, not only do you miss the opportunity to pay down your mortgage balance, but the interest is still charged and added to your mortgage balance.
Statement of Adjustments
On closing day, when everything else is said and done, two statements of adjustments are made: one for the buyer and one for the seller. Each statement is made by the respective real estate lawyer and outlines the closing costs each person will have to pay that day.
Terms and Conditions
The terms and conditions outlined in your mortgage agreement should be carefully considered. Some of the most common terms include whether your mortgage is a collateral or standard charge, portable or assumable, the prepayment options, and how a potential prepayment penalty would be calculated.
Additional monthly carrying costs you will need to pay for, for services such as your water, electricity, heating, cable, phone, Internet, etc.
Weekly Mortgage Payment
When your monthly mortgage payment is multiplied by 12 months and divided by the 52 weeks in a year. The amount is withdrawn from your bank account every week, so you make 52 payments per year.