Canadian Mortgage Terms Explained
Mystified by all the financial jargon used to describe mortgages? Here's a quick overview of key terms to help you understand the language - and make the process clearer and easier.
Mortgage. A personal loan used to purchase a property. You pledge the property being purchased as security for the loan.
Down payment. The portion of the purchase price that you pay initially as a lump sum; the rest is financed by your financial institution. A down payment is generally up to 25% of the purchase price.
Principal. The amount of your loan.
Interest. This is added to the amount you have borrowed to compensate the lender for the use of their money. Your mortgage is repaid in regular payments which are applied toward the principal and interest.
Term. The number of months or years the mortgage contract covers (typically six months to five years), during which you pay a specified interest rate.
Amortization. The number of years it will take to repay the mortgage in full. (This is usually longer than the term of the mortgage.) For instance, you may have a five-year term amortized over 25 years.
Equity. The difference between the value of your property and the amount you still owe on the mortgage.
Conventional mortgage. Offered to buyers who make a down payment of 25% or more of the appraised value or purchase price.
High ratio mortgage. Offered to buyers with a down payment of less than 25%. This type of loan must be insured against default by the federal government through the Canada Mortgage and Housing Corporation (CMHC) or an approved private insurer (the lender usually arranges this). The borrower pays a one-time insurance premium to the insurer (ranging from 0.5% to 3.75% depending on the size of the loan and value of the home; additional charges may also apply). The premium is usually added to the principal amount of the mortgage. If you default on your mortgage, the lender is paid by the insurer.
Fixed rate mortgage. Carries a set interest rate for a specific period of time (the term of the mortgage). The regular payment of the principal and interest remains the same throughout the term. The benefit of choosing this option is that you are protected if interest rates rise.
Open mortgage. Gives you the flexibility to make unlimited pre-payments or lock into a fixed term at any time. This loan's interest rate changes periodically, and is tied to the prime rate. This type of mortgage is popular when interest rates are expected to fall or remain stable.
Portability. If you are selling your home and buying another, this option allows you to take your mortgage - with the same term, rate and amount - and apply it to your new house. If your mortgage isn't portable, don't sign for a longer term than you're likely to stay in the house or you could wind up paying a penalty to break the mortgage agreement.
Assumability. This feature allows the buyer of your house to take over or "assume" your mortgage. If your mortgage has a fixed interest rate lower than current rates, it could be an attractive selling feature.