Mortgage Term Glossary

A

Amortization period: The number of years over which you will repay a loan. The most common mortgage amortization periods are 20 years and 25 years.

Appraisal: A process for estimating the market value of a particular property.

B

Blended Payment: A mortgage payment that includes principal and interest. It is paid regularly during the term of the mortgage. The payment total remains the same, although the principal portion increases over time and the interest portion decreases.

C

Closed Mortgage: A mortgage that cannot be prepaid or renegotiated before the term's end unless the lender agrees and the borrower is willing to pay an interest penalty. Many closed mortgages limit prepayment options such as increasing your mortgage payment or lump sum prepayment (usually up to 20% of your original principal amount).

Closing Costs: Costs in addition to the purchase price of the home, such as legal fees, transfer fees and disbursements, that are payable on the closing day.

Closing Date: The date at which the sale of a property becomes final and the new owner takes possession.

CMHC/Canada Mortgage and Housing Corporation: The Canada Mortgage and Housing Corporation is a federal Crown corporation that administers the National Housing Act. CMHC's services include providing housing information and assistance to consumers and providing mortgage default insurance for high ratio mortgages.

Conditional Offer: An Offer to Purchase that is subject to specified conditions, for example, the arrangement of a mortgage. There is usually a stipulated time limit within which the specified conditions must be met.

Commitment Letter/Mortgage Approval: Written notification from the mortgage lender to the borrower that approves the advancement of a specified amount of mortgage funds under specified conditions.

Conventional Mortgage: A mortgage loan up to a maximum of 80% of the lending value of the property. Typically, the lending value is the lesser of the purchase price or the market value of the property. Mortgage loan insurance is usually not required for this type of mortgage.

Counteroffer: If your original offer to the vendor is not accepted, the vendor may counteroffer. This means that the vendor has amended something from your original offer, such as the price or closing date. If a counteroffer is presented, the individual has a specified amount of time to accept or reject it.

Credit Report: The main report a lender uses to determine your creditworthiness. It includes information about your ability to handle your debt obligations and your current outstanding obligations.

D

Deed: A legal document that is signed by both the vendor and purchaser, transferring ownership. This document is registered as evidence of ownership.

Default: Failure to abide by the terms of a mortgage loan agreement. A failure to make mortgage payments (defaulting the loan) may give cause to the mortgage holder to take legal action to possess (foreclose) the mortgaged property.

Deposit: Money placed in trust by the purchaser when an Offer to Purchase is made. The sum is held by the real estate representative or lawyer/notary until the sale is closed and then it is paid to the vendor.

Depreciation: The decrease in value of something because it is now worth less than when you bought it.

Down Payment: The portion of the home price that is not financed by the mortgage loan. The buyer must pay the down payment from his/her own funds or other eligible sources before securing a mortgage.

E

Equity: The difference between the price for which a home could be sold and the total debts registered against it. Equity usually increases as the mortgage is reduced through regular payments. Market values and improvements to the property may also affect equity.

F

Fixed rate mortgage: A mortgage for which the rate of interest is fixed for a specific period of time (the term).

Foreclosure: The legal process where the lender takes possession of the property after the borrower defaulted on payments.

G

Gross Debt Service Ratio (GDS): The percentage of the borrower's gross monthly income that will be used for monthly payments of principal, interest, taxes and heating costs and half of any condominium maintenance fees.

Gross Household Income: Gross household income is the total salary, wages, commissions and other assured income, before deductions, by all household members who are co-applicants for the mortgage.

H

High-Ratio Mortgage: A mortgage loan higher than 80% of the lending value of the property. This type of mortgage may have to be insured — for example, by CMHC or a private company — against payment default.

HSBC Smart Savers Mortgage^TM: The new HSBC Smart Savers Mortgage lets you link your savings and chequing accounts to your mortgage to lower the actual mortgage interest rate paid. You pay down your mortgage faster and still have instant access to your money whenever you need it. HSBC has introduced this type of mortgage in several other international markets such as the UK and Hong Kong with great success.

I

Interest: The cost of borrowing money. Interest is usually paid to the lender in regular payments along with repayment of the principal (loan amount).

Interest Rate: The annual percentage amount charged in return for borrowing funds.

L

Lump Sum Prepayment: An extra payment, made in lump sum, to reduce the principal balance of your mortgage, with or without penalty. A closed mortgage typically restricts the amount and frequency of the prepayments you can make. With an open mortgage, however, you can make a lump sum prepayment at any time without penalty. Making prepayments can help you pay off your mortgage sooner and ultimately save on interest costs over the life of your mortgage.

M

Maturity Date: The last day of the term of the mortgage. On this day, the mortgage loan must either be paid in full or the agreement renewed.

Mortgage: A mortgage is a security for a loan on the property you own. It is repaid in regular mortgage payments, which are usually blended payments. This means that the payment includes the principal (amount borrowed) plus the interest (the charge for borrowing money). The payment may also include a portion of the property taxes.

Mortgage Approval/Commitment Letter: Written notification from the mortgage lender to the borrower that approves the advancement of a specified amount of mortgage funds under specified conditions.

Mortgage Life Insurance: Mortgage life insurance provides coverage for your family should you die before your mortgage is paid off. This insurance can be purchased through your lender and the premium added to your mortgage.

Mortgage Loan Insurance: If you have a high-ratio mortgage (more than 80% of the lending value of the property) your lender will probably require mortgage loan insurance, which is available from CMHC or a private company.

Mortgage Payment: A regularly scheduled payment that is often blended to include both principal and interest.

O

Open Mortgage: A mortgage that can be prepaid or paid off or renegotiated at any time and in any amount without interest penalty. The interest rate on an open mortgage is usually higher than a closed mortgage with an equivalent term.

P

Principal: The amount that you borrow for a mortgage. Each monthly mortgage payment consists of a portion of the principal that must be repaid plus the interest on the outstanding loan balance.

PITH: Principal, interest, taxes and heating — costs used to calculate the Gross Debt Service ratio (GDS).

Property Insurance: Insurance that you buy for the building(s) on the land you own. This insurance should be high enough to pay for the building to be re-built if it is destroyed by fire or other hazards listed in the policy.

R

Rate (interest): The annual percentage amount charged in return for borrowing funds.

Refinancing: Renegotiating your existing mortgage agreement. May include increasing the principal or paying out the mortgage in full.

Renewal: At the end of a mortgage term, the mortgage may be renewed on new terms and conditions acceptable to both the lender and the borrower. Otherwise, the lender is entitled to be repaid in full. In this case, the borrower may seek alternative financing elsewhere.

S

Survey or Certificate of Location: A document that shows property boundaries and measurements, specifies the location of buildings on the property and states easements or encroachments. 

T

Term: The term of a mortgage is the length of time that the mortgage conditions, including the interest rate you pay, are carried out. At the end of the term, the borrower can pay off the mortgage or renew for another term. Mortgage terms can range from six months to ten years.

Title: A freehold title gives the holder full and exclusive ownership of the land and building for an indefinite period.

Total Debt Service Ratio (TDS): The percentage of gross monthly income required to cover the monthly housing payments and other debts, such as car payments.

Traditional Mortgage/Conventional Mortgage: A mortgage loan up to a maximum of 80% of the value (the purchase price or the market value, whichever is less) of the property.

V

Variable Rate Mortgage: A mortgage in which the rate of interest may change if the market conditions change. This is also referred to as a floating rate mortgage.