Definitions

Amortization Period

The amortization period is the number of years that the payments of your mortgage are spread out over.

Note: You can go up to 30 year amortization on your mortgage, if you have 20% or higher down payment.

Appraisal

An appraisal is a report that gives you the current estimated dollar amount of your home. The amount your home is appraised for, will be determined by recent comparable home sales in your area.

Note: Usually when you get a mortgage, your lender will require an appraisal and you will cover the cost of said appraisal.

Closed Mortgage

A closed mortgage carries penalties for refinancing, renegotiating or paying the mortgage off before the end of the mortgage term. This means when you choose this mortgage, you are locked into all terms of the mortgage for the entire term.
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Conventional Mortgage

A conventional mortgage, also known as an uninsured mortgage, is where you have put down at least 20% for the down payment.

In this case, the lender does not require mortgage default insurance.

Down Payment

The down payment is the chunk of your own money that you’re using to buy the home. 5% of the purchase price is the minimum amount of down payment required to make a purchase.

Note: If the home you’re buying is for you or your family to live, the minimum down payment is 5%.
If the home you are buying is a rental property, the minimum down payment is 20%

Equity

Equity is the amount the home is worth, minus the amount owing on the home.

Example:
You own a house worth $350,000 and your mortgage balance is $250,000. You would have $100,000 in equity in your home.

Try our Home Equity Calculator to see how much equity you have in your home.

Fixed Rate Mortgage

The interest rate and payment on your mortgage will remain constant throughout the term of your mortgage.

‍Note: Fixed mortgage rates are generally determined by Government of Canada bond yields.

GDS (Gross Debt Service Ratio)

Another metric used by the lender to determine how much financing to extend to a client, GDS differs slightly as it doesn’t include other debt. The max GDS ratio most lenders use is 39%.

To determine your GDS the lender will use the following calculation:

‍(Mortgage Payment + Taxes + Heat) / Gross Annual Income = GDS

HELOC (Home Equity Line of Credit)

This is a line of credit extended to you from a lender and secured against the equity in your home. Check out our Home Equity Loans page.

Example:
Your home is worth $500,000 and you owe $250,000 on your mortgage.

This means that you have $250,000 in equity in your home.
Since you can borrow up to 80% of the value of the home, you can borrow $400,000.

Since you still owe $250,000 you can borrow an additional $150,000 as a HELOC.
Heloc Interest rates are usually about 1% higher than mortgage rates.

Home Inspection

When buying a home, it’s a good idea to have a home inspection done first. The inspector will go through your home top to bottom to find any issues you’d want to know about before making the purchase.

Insured Mortgage

An insured mortgage is a mortgage that has a mortgage default insurance policy on it. Having this policy allows your down payment to be as low as 5% of the purchase price.

See the CMHC page for more details.

IRD (Interest Rate Differential)

This is the calculation that a bank or lender uses to determine your penalty for breaking a fixed rate mortgage. The penalty can be into the tens of thousands of dollars depending on the length of term left on your mortgage, the original interest rate, and the new interest rate.

Each lender has their own calculation for determining what this penalty will be.

Your mortgage broker or lender will be able to help you determine what your penalty will be.

Loan to Value (LTV)

LTV is a ratio of the mortgage balance to the value of the property.

Example: If you put down 5% for your down payment, the LTV would be 95% at the time of purchase.

Mortgage Default Insurance

This provides insurance to the lender in case you default on your mortgage. You are required to purchase mortgage default insurance if you put down less than 20% for your down payment.

See the mortgage insurance page for more details.

Mortgage Life Insurance

This is an insurance policy that will pay off your mortgage in case of your death.

Note: You’re way better off buying life insurance than mortgage life insurance. The amount payable upon your death does not change with life insurance. With Mortgage life insurance, the amount payable upon your death decreases with every mortgage payment you make.

See the mortgage insurance page for more details.

Mortgage Term

The mortgage term is the length of the contract that you are committed to your lender and is typically between 1 year and 5 years in Canada. Example: if you have a 5 year fixed mortgage rate, your term is 5 years.

Open Mortgage

An open mortgage gives you the option of repaying your mortgage at any time without having to pay a penalty.

Note: The interest rate on an open mortgage is usually quite a bit higher than a closed mortgage interest rate.

Overnight Lending Rate

The Bank of Canada sets a target for banks to borrow and loan money to each other for 1-day loans. This target rate influences the banks prime rate.

‍The current Bank of Canada Overnight Lending Rate is 2.50%

Porting a Mortgage

Porting a mortgage is when you you move your mortgage from one property to another. It is common to port a mortgage when you move. It allows you to break your original mortgage without paying a penalty as long as the balance is the same or higher on your new property.

Note: Not all mortgages are portable.

Prime Rate

This is the interest rate that lenders use as a baseline for variable rate mortgages and HELOCs. The prime rate moves in conjunction with the Bank of Canada’s overnight lending rate.

‍The current prime rate in Canada is 6.95%

RPR (Real Property Report)

The RPR is a computer drafted drawing done by a land surveyor showing the property lines and all the structures and buildings on it such as fence, garage, shed, house etc.

Date the RPR was completed
Land title number and the name of the owners registered on title
Location and description with dimensions of the property and permanent structures
Properties, roads and lanes next to your property
Stamped and dated showing municipal approval
Easments
Legal description and address of the property

Personally, I would never purchase a property without the seller providing an updated RPR. The biggest reason its so important to have the seller provide a RPR is so that if there are any issues with the placement of any structures, the seller can cover the legal costs to have the issue resolved before the sale.

Secured vs Unsecured Loan

Secured Loan means that the bank gave you that loan knowing that if you default on the loan, they will foreclose on the property in which the loan is secured to. This almost guarantees that the bank will get their money back. Because of the security of this loan, it can be loaned to you at a much lower interest rate than an unsecured loan.

Unsecured loans are higher risk to the lender since they are not secured to an asset. For that reason, the interest rate on a unsecured loan will be much higher.

TDS (Total Debt Service Ratio)

This is an income to debt ratio that the banks use to determine how much mortgage you can qualify for. Most banks have a max TDS of 44%.

To determine your TDS, the lender will use the following calculation:

‍(Annual Mortgage payment + Property Taxes + Heat + Other debt payments) / Gross Annual Income = TDS

‍Other debt payments may include:

Car loans
Student loans
Line of Credit payments
Credit Card debt

Title Insurance

What is Title insurance?

Title refers to the rights to ownership of the land. When you buy a home, title is transferred to you.

Title Insurance is an optional insurance policy that protects the buyer from problems arising with the title on the property when there is a change in owner of the property. If there is an issue that arise during transfer of ownership, the policy may cover your legal expenses incurred.

The policy will cover you from such risks as:

Title fraud (someone tries to take ownership of your property through fraudulent activity)
Encroachments that were unknown at the time of purchase (Your neighbor built a structure that is now on your property)
Easements
Zoning compliance (The property use may not meet certain zoning by-laws)

Some lenders will require you to purchase a title insurance property and it generally costs around $400.
The policy will always be active as long as you’re the owner. To purchase title insurance, talk your
lawyer who is representing you for the purchase.

Variable Rate Mortgage

Your interest rate will fluctuate over your mortgage term based on the Bank of Canada’s overnight lending rate. When the BoC changes their rate, your mortgage interest rate will increase or decrease accordingly.

Definitions

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