A Glossary of Mortgage Terms and Their Definitions for New Home Buyers

A Glossary of Mortgage Terms and Their Definitions for New Home Buyers

 

Buying your new home is an exciting new adventure! As with every new adventure, there may be some new terminology that you may not be familiar with. This handy guide can inform you as you complete your mortgage documentation. Don’t forget – you can always contact the friendly folks at Ownest for any additional information or help relating to your mortgage application!

 

Adjustable-Rate Mortgage

Adjustable-rate mortgages, or ARMs, are also known as variable-rate mortgages. ARMs have flexible interest rates, meaning that the interest rate on the mortgage will vary based on an underlying index and the prime interest rate set by the lender. (Also see Variable Rate Mortgage)

Affordability

Your ability to carry the cost of ownership of a property in relation to your available income.

Amortization

A fancy way of saying the process of spreading out payments over time. You pay your mortgage over time by way of instalment payments which usually include principal and interest. At the start of your loan period, most of your payment goes towards interest, but over time you chip away at the principal. (See Principal and Interest.)

Amortization Period

The period of time required to repay your mortgage by equal instalments of set payments based on a particular interest rate. The payments are usually a combination of principal and interest in blended amounts.

Amortization Schedule

A table showing the amount of principal and interest in each of your payment instalments and the outstanding principal balance of the loan after each payment is made.

Annual Percentage Rate

Annual percentage rate (APR) is the interest rate that you will pay annually for your loan. It includes additional lender fees. It is usually expressed as a percentage. If you see two interest rates when you shop for a loan or mortgage, the higher rate is your APR.

Applicant (Mortgage)

Refers to all borrowers, co-borrowers and guarantors on a mortgage loan application.

Appraisal

An unbiased opinion by a professional of your home, based on your home’s physical and functional characteristics and the value of homes nearby. Mortgage lenders require an appraisal before they will grant you a mortgage on your home.

Balance

The amount of unpaid mortgage left after a payment has been made.

Blended Payments

Blended payments are a way of repaying a loan that sets equal monthly payments of principal and interest (blended) over an amortization period. By contrast, in a “principal and interest” loan, the borrower pays back the same amount of principal each month, plus a steadily decreasing interest payment.

Borrower

The one who obtains financing from a lender with the agreement that it will be repaid, with interest, within a defined timeframe. You are the borrower if you are getting a mortgage.

Canada Guaranty

A leading private mortgage insurer providing mortgage default insurance.

Canada Mortgage and Housing Corporation (CMHC)

The federal crown corporation that established mortgage default insurance for lenders and which promotes the construction of new homes, the repair and modernization of existing houses, and the improvement of housing and living conditions. (See also Canada Guaranty and Genworth)

Closed Mortgage

A closed mortgage is one that cannot be fully paid off, refinanced or renegotiated before the end of the term without incurring a penalty. Lender breakage costs, the opportunity cost to a lender of a borrower repaying a loan before scheduled maturity, will incur a payout penalty.

Credit Report

A record that details an applicant’s past borrowing and repayment history, and which is the reason for their credit score. Lenders often obtain borrower’s credit reports from Equifax and Trans Union.

Credit Score

Your credit score is a three-digit number that comes from the information in your credit report. It shows how well you manage credit and how risky it would be for a lender to lend you money. Your credit score is calculated using a formula based on your credit report.

Debt Ratio

Also called debt-to-income ratio or debt service ratio, it’s a comparison of your total monthly payments to your income. It is used to determine how much of a mortgage you can afford as a borrower. It’s the percentage of your income that goes toward paying your monthly debts, and it helps lenders decide how much you can borrow. (Also see Gross Debt Ratio and Total Debt Service)

Down Payment

The part of the purchase price of a home that the buyer pays in cash and does not finance with a mortgage. The minimum requirement in Canada is five per cent and can be from your own resources (cash, savings, investments) or be gifted or borrowed from a credit card or line of credit.

Fixed-Rate Mortgage

A fixed-rate mortgage is one in which the interest rate remains the same over the whole term of the mortgage.

Floating Rate

A floating (aka variable or adjustable) mortgage rate refers to a mortgage that does not have a fixed rate of interest over the life of the instrument but rather floats with the market.

Genworth

A leading private mortgage insurer providing mortgage default insurance.

Gross Debt Ratio

A ratio that is the percentage of your income needed to pay all of your monthly housing costs, including principal, interest, taxes, and heat (PITH). It also includes 50% of your condo fees, if applicable. The percentage can vary by lender.

Interest Rate

The amount charged by a lender to a borrower for the use of borrowed funds, calculated as a percentage of the principal.

Lender

The bank or other institution responsible for underwriting, funding, and administering your mortgage loan and to whom your real estate is pledged as security for the loan. (Also see Mortgagee)

Maturity

The end of a term, or period, for a mortgage loan at which time the borrower may have the option to pay off the mortgage, renew it with the existing lender or transfer it to another lender. The maturity date of a mortgage is when the mortgage term ends. It is often referred to as the renewal date because it’s when you as the borrower may have the option to renew, refinance, or pay your mortgage off completely, with no penalty. (Also see Mortgage Renewal)

Mortgage

A mortgage is a type of loan used to buy a home or other property. It allows the lender to take possession of the property if you don’t repay the loan on time. The property is the security for the loan. The payments cover the interest on the loan plus the principal (the amount of the loan).

Mortgage Insurance

A credit risk management tool protecting the lender from losses due to default on the mortgage by the borrower. It is typically required when the loan to value ratio for the property is 80% or greater.

Mortgage Pre-Qualification

A pre-qualification gives you an estimate of ow much house you can afford, based on your credit information, gross household income and overall finances. It does not require supporting paperwork.

Mortgage Pre-Approval      

The tentative approval for a mortgage, made in advance of a home purchase. It is valid for a specified time period and is subject to the borrower submitting their supporting documentation to the lender, and subject to their financial position not changing. Once a property has been purchased, the property must also meet the lender’s underwriting requirements.

Mortgage Renewal

The process by which a borrower agrees to another mortgage term with the current lender to replace the term that has matured. At the end of the prior mortgage term, and with a balance of funds still owing, the borrower may choose to continue with the same lender for another term. However, the details of the mortgage document may change at the time of the mortgage renewal to reflect the current mortgage market. The new term leaves the existing registered mortgage in place and is therefore not considered a new mortgage. The old mortgage document secures the renewed term, and its provisions are amended to fit the new term.

Mortgage Statement

A statement received from the lender that includes details of the mortgage such as property address, outstanding principal balance, monthly payment, interest rate and mortgage term.

Mortgage Term

The period for which the lender loans funds to the borrower, as specified in the mortgage agreement. At the end of the mortgage term, the principal and unpaid interest are due and payable by the borrower to the lender. At that time, the borrower may renew or refinance the mortgage. (Also see Mortgage Refinance and Mortgage Renewal)

Mortgagee

An individual or organization that lends money secured by real property for which they may receive specified payments according to the mortgage agreement. (Also see Lender)

Mortgagor

The borrower in a mortgage, typically the home buyer. The mortgagor makes specified payments according to the mortgage agreement. (Also see Borrower)

Open Mortgage

A mortgage that can be paid off early without any penalties or fees attached.

Principal (Mortgage)

The amount of funds originally borrowed from the lender or the portion of a mortgage still owing upon which interest is calculated.

Qualifying

The process of determining a prospective borrower’s eligibility for mortgage financing related to a potential real estate purchase. (Also see Mortgage Pre-Approval)

Term

The period for which the lender loans funds to the borrower, as specified in the mortgage agreement. (Also see Mortgage Term)

Total Debt Service (TDS)

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 percentage can vary by lender. (Also see Debt Ratio)

Title

A document that records the information about the land, such as the legal land description, municipal jurisdiction, ownership, and registered interests. The Land Titles Office no longer issues a paper Certificate of Title, but a paper copy may be available from any Registry Agent in Alberta. An electronic copy is available on the Spatial Information System (SPIN) operated by Alberta Registries, Service Alberta.

Variable Rate Mortgage

A mortgage where the interest rate is periodically adjusted based on the prime lending rate typically set by the lender. Rather than being a Fixed Rate Mortgage, which has the same interest rate over the term, when an interest rate change occurs, payments may be increased or decreased. (Also see Floating Rate)

 

Do you have mortgage-related questions? Feel free to contact us and one of our friendly in-house experts will be happy to help!