DEFINITIONS
A glossary of mortgage terms
Plain-language definitions for the discerning reader.
Amortization
The total length of time over which you agree to repay your mortgage in full. Common amortization periods are 25 or 30 years. A longer amortization means lower monthly payments but more interest paid over the life of the mortgage.
Appraisal
A professional assessment of a property's market value conducted by a licensed appraiser. Lenders require appraisals to ensure the property value supports the mortgage amount being requested.
Assumable Mortgage
A mortgage that can be transferred from the seller to the buyer when a property is sold. The buyer 'assumes' the existing mortgage terms, including the interest rate. This can be advantageous when the existing rate is lower than current market rates.
Blended Rate
A single interest rate that combines an existing mortgage rate with a new rate when you increase your mortgage amount or extend your term before maturity. It represents a weighted average of both rates.
Blanket Mortgage
A single mortgage that covers multiple properties. Often used by real estate investors or developers who own several properties and want to consolidate financing under one loan.
Bridge Loan
Short-term financing that 'bridges' the gap when you purchase a new home before selling your existing one. It provides temporary funds to complete the new purchase, repaid when your existing home sells.
Closed Mortgage
A mortgage with restrictions on prepayment. You may face penalties for paying off the mortgage early or making prepayments beyond allowed limits. Closed mortgages typically offer lower interest rates than open mortgages.
CMHC Insurance
Mortgage default insurance provided by Canada Mortgage and Housing Corporation. Required when your down payment is less than 20% of the purchase price. It protects the lender if you default, enabling them to offer mortgages with smaller down payments.
Conventional Mortgage
A mortgage where the down payment is 20% or more of the purchase price. Conventional mortgages do not require mortgage default insurance, which can result in overall cost savings.
Conditional Offer
A purchase offer that depends on certain conditions being met before the sale is finalized — typically financing approval, satisfactory home inspection, or sale of the buyer's existing home.
Closing Costs
Expenses beyond the purchase price that are due when finalizing a real estate transaction. These include legal fees, land transfer tax, title insurance, appraisal fees, and adjustments for prepaid property taxes or utilities.
Debt Service Ratio (GDS/TDS)
Calculations lenders use to determine how much mortgage you can afford. GDS (Gross Debt Service) includes housing costs as a percentage of income. TDS (Total Debt Service) adds other debts. Typical maximums are 39% GDS and 44% TDS.
Down Payment
The portion of the purchase price you pay upfront from your own funds. In Canada, minimum down payments range from 5% (for homes up to $500,000) to 20% (for homes over $1,500,000 or to avoid default insurance).
Default
Failure to meet the legal obligations of a mortgage — typically missing payments. Serious default can lead to foreclosure or power of sale, where the lender takes possession of the property to recover their funds.
Equity
The portion of your home's value that you own outright — the difference between the property's market value and any outstanding mortgage balance. Equity builds as you pay down your mortgage and/or as property values increase.
Escrow
An arrangement where a neutral third party holds funds or documents until certain conditions are met. In mortgages, lenders may collect property tax and insurance payments in escrow and pay them on your behalf.
Fixed Rate
An interest rate that remains constant throughout the mortgage term. Your payments stay the same regardless of market rate fluctuations, providing payment stability and predictability.
First Mortgage
The primary mortgage registered against a property. It has first priority for repayment if the property is sold or foreclosed. Additional mortgages (second, third) are subordinate to the first.
FHSA (First Home Savings Account)
A registered account allowing first-time buyers to save up to $40,000 for a home purchase. Contributions are tax-deductible (like RRSPs) and withdrawals for qualifying home purchases are tax-free (like TFSAs).
Foreclosure
A legal process where the lender takes ownership of a property after the borrower defaults on mortgage payments. In Ontario, 'power of sale' is more common, where the lender sells the property but doesn't take ownership.
GDS Ratio
Gross Debt Service ratio — the percentage of your gross income required to cover housing costs (mortgage payments, property taxes, heating, and 50% of condo fees if applicable). Lenders typically require GDS below 39%.
Gift Letter
A signed document confirming that funds provided for a down payment are a true gift with no repayment obligation. Lenders require this when down payment funds come from family members rather than the buyer's own savings.
Guarantor
A person who agrees to be responsible for a mortgage if the primary borrower defaults. Adding a guarantor with strong credit or income can help borrowers who might not qualify on their own.
HELOC
Home Equity Line of Credit — a revolving credit facility secured against your home's equity. Unlike a mortgage, you can borrow, repay, and reborrow up to your credit limit. Interest rates are typically variable and based on prime.
High-Ratio Mortgage
A mortgage where the down payment is less than 20% of the purchase price, resulting in a loan-to-value ratio above 80%. High-ratio mortgages require mortgage default insurance (CMHC, Sagen, or Canada Guaranty).
Home Inspection
A professional examination of a property's condition, typically conducted before purchase. The inspector assesses structural elements, electrical, plumbing, HVAC, and other systems, identifying potential issues or needed repairs.
Interest Rate
The cost of borrowing money, expressed as a percentage of the principal. It determines how much you pay the lender beyond repaying the amount borrowed. Rates can be fixed or variable.
Interest Adjustment Date
The date from which interest on your mortgage begins to be calculated on the full principal amount. It falls between your closing date and the start of your regular payment schedule, with interest for this period paid at closing.
Joint Tenancy
A form of property ownership where two or more people hold equal, undivided interests. When one owner dies, their share automatically passes to the surviving owner(s) through right of survivorship, bypassing the estate.
Land Transfer Tax
A provincial tax paid when purchasing real estate, calculated as a percentage of the purchase price. Ontario uses a graduated scale. Toronto levies an additional municipal land transfer tax. First-time buyers may qualify for rebates.
Lien
A legal claim against a property as security for a debt or obligation. Mortgages are liens. Other liens might arise from unpaid taxes, contractor work, or court judgments. Liens must typically be cleared before a property can be sold.
Loan-to-Value Ratio
The mortgage amount expressed as a percentage of the property's value. An 80% LTV means the mortgage is 80% of the home's value (20% down payment). Higher LTV ratios require mortgage default insurance in Canada.
Maturity Date
The date when your mortgage term ends. At maturity, you must either pay off the remaining balance, renew with your current lender, or refinance with a different lender. This is distinct from amortization (the full repayment period).
Mortgage Default Insurance
Insurance that protects the lender if you default on your mortgage. Required in Canada when the down payment is less than 20%. Provided by CMHC, Sagen, or Canada Guaranty. The premium is typically added to your mortgage.
Mortgage Insurance
Can refer to mortgage default insurance (protects lender) or mortgage life/disability insurance (protects borrower/family by paying off the mortgage if you die or become disabled). These are different products with different purposes.
Mortgage Term
The length of time your mortgage contract and interest rate are in effect — typically 1 to 5 years in Canada. At the end of the term, you renew or refinance. The term is shorter than the amortization period.
Notice of Assessment (NOA)
An annual statement from the Canada Revenue Agency confirming your reported income and taxes owing or refund. Lenders require NOAs to verify income claimed on mortgage applications, particularly for self-employed borrowers.
Open Mortgage
A mortgage that can be paid off in full at any time without penalty. Open mortgages offer flexibility but typically have higher interest rates than closed mortgages. Useful if you expect to pay off the mortgage soon.
Origination
The process of creating a new mortgage — from application through underwriting to funding. Origination involves document collection, credit assessment, property valuation, and final approval.
Penalty (IRD)
Interest Rate Differential — a prepayment penalty calculated as the difference between your current rate and the lender's current rate for the remaining term, multiplied by the principal and time remaining. Can be substantial for fixed-rate mortgages.
Portable Mortgage
A mortgage that can be transferred to a new property when you sell your current home and buy another. Portability lets you keep your existing rate and terms, potentially avoiding prepayment penalties.
Pre-Approval
A lender's conditional commitment to provide mortgage financing up to a specified amount, pending property selection and final verification. Pre-approval typically includes a rate hold protecting you from rate increases for 90-120 days.
Principal
The original amount borrowed, not including interest. As you make mortgage payments, a portion goes to interest and a portion reduces the principal. Over time, more of each payment goes toward principal (amortization).
Prime Rate
The benchmark interest rate that Canadian banks use as a reference for variable-rate products. Variable mortgage rates are typically expressed as 'prime minus X%' or 'prime plus X%.' The prime rate moves with the Bank of Canada's policy rate.
Property Tax
Annual municipal taxes based on your property's assessed value. Lenders consider property taxes when calculating your debt service ratios. Some lenders collect property taxes with your mortgage payment and remit them on your behalf.
Qualifying Rate
The interest rate used to determine if you can afford a mortgage, often higher than your actual contracted rate. The federal 'stress test' requires qualifying at the greater of the contract rate plus 2% or the benchmark rate (currently around 5.25%).
Refinance
Replacing your existing mortgage with a new one, typically to access equity, secure a better rate, consolidate debt, or change loan terms. Refinancing may involve costs including legal fees and potential prepayment penalties.
Renewal
The process of extending your mortgage at the end of its term. You can renew with your current lender (often the simplest option) or switch to a different lender (may offer better rates but involves legal/transfer costs).
Reverse Mortgage
A loan allowing homeowners 55+ to access home equity without selling or making regular payments. The loan (plus accumulating interest) is repaid when the home is sold or the borrower dies/moves. The borrower retains ownership.
Second Mortgage
An additional mortgage taken out against a property that already has a first mortgage. Second mortgages are subordinate to first mortgages in priority and typically carry higher interest rates due to increased lender risk.
Stress Test
Federal requirement that mortgage borrowers must qualify at a rate higher than their actual contract rate — typically the greater of the contract rate plus 2% or a benchmark rate. Ensures borrowers can handle rate increases.
Survey
A document showing property boundaries, dimensions, and the location of structures. Surveys confirm what you're purchasing matches the legal description. Lenders may require a current survey, though title insurance often provides an alternative.
TDS Ratio
Total Debt Service ratio — the percentage of your gross income required to cover all debt payments, including housing costs plus other loans, credit cards, and lines of credit. Lenders typically require TDS below 44%.
Term
The period during which your mortgage contract conditions (including interest rate) are in effect. At term end, you renew or refinance. Common terms are 1-5 years, though longer terms (7-10 years) are available.
Title Insurance
Insurance protecting against losses from title defects, survey issues, fraud, or other ownership problems. Title insurance is typically required by lenders and provides ongoing protection for a one-time premium paid at closing.
Underwriting
The process lenders use to evaluate mortgage applications — assessing credit, income, employment, property value, and overall risk. Underwriters decide whether to approve, decline, or request additional information.
Unsecured Loan
A loan not backed by collateral. Credit cards and personal lines of credit are common examples. Unsecured loans typically have higher interest rates than secured loans (like mortgages) because they pose more risk to lenders.
Variable Rate
An interest rate that fluctuates with market conditions, typically tied to the lender's prime rate. Your payment may stay fixed while the interest/principal split changes, or your payment may adjust with rate changes.
Vendor Take-Back Mortgage
A mortgage where the property seller provides financing to the buyer, essentially 'taking back' a mortgage as part of the sale. Can help buyers who have difficulty qualifying through traditional lenders.
Wraparound Mortgage
A secondary financing arrangement where a new mortgage 'wraps around' an existing mortgage. The new lender makes payments on the original mortgage while the borrower makes payments on the larger wraparound loan. Rarely used in Canada.
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