Appendix

Common Mortgage Terms 

 

Amortization: under the conditions of your mortgage contract, this is the estimated amount of time it will take you to fully repay your mortgage, assuming you maintain equal payments throughout the lifetime of your loan.

 

Closed-Term: you may prepay your mortgage as outlined in the conditions of your mortgage agreement. Should you prepay more than is allowed under your agreements, you most likely will be subject to penalties.

 

CMHC Insurance: (Only Applicable to Canada) These are mortgages that are insured by the Canada Mortgage and Housing Corporation if a borrower defaults on their mortgage obligations to the lender. CMHC insurance is mandatory for mortgages where the down payment on the house is between 5.00% (the minimum amount allowed) and 19.99%. The premium for the insurance policy ranges between 0.6% and 4.50% of the mortgage amount and can be paid at the time of purchase or added to the principal amount of your mortgage. The borrower is responsible for the insurance premiums.

 

Conventional Mortgage: a mortgage where the down payment on the property is 20% of the purchase price or greater.

 

Discharge: a legal document that releases the collateral hold a lender-placed on your home when you obtained a mortgage from them. To sell your home, the property’s title must be free from any collateral holds or liens. This means a mortgage discharge must be recorded. Your lender often takes care of the discharge paperwork (fees for this service may be applicable depending on the jurisdiction).

 

Fixed-Rate: this is a locked-in interest rate that you will pay for the duration of your mortgage term. Unlike variable interest rates, your fixed interest rate will not change during your term. This means you will be protected from higher interest rates if a lender’s Prime Rate increases, but also means that you will not benefit from lower interest rates in the event the Prime Rate decreases.

 

High-Ratio Mortgage: a mortgage where the down payment on the property is less than 20% of the purchase price. These mortgages require CMHC insurance.

 

Penalty: this is a sum of money that is charged by the lender in the event you prepay your mortgage, in part or in full, as outlined in your initial mortgage contract. Penalties may or may not apply to your mortgage; therefore, we suggest consulting your mortgage documentation and/or broker before making large prepayments.

 

Open-Term: you may prepay your mortgage, in part or in full, at any time during your mortgage term without penalties.

 

Portability: an option that lets you transfer or switch your mortgage to another home with little or no penalty when you sell your existing home (as opposed to paying off your mortgage and requalify for a new one).

 

Prepayment: a prepayment is a lump sum payment against the principal balance of your mortgage. The amount you are allowed to prepay and how often is outlined in your mortgage agreement and often depends on whether you have an open-term or closed-term mortgage.

 

Prime Rate: this is a bank’s base lending rate. The Prime Rate often changes about monetary policy and interest rates set by the Bank of Canada. Often, mortgage rates (particularly variable interest rates) are expressed as “Prime +/- a percentage.”

 

Principal: this is the outstanding balance of the sum you borrowed, not including interest.

 

Second or Third Mortgage (Lien Holder’s Positioning): refers to a lien on a property that is subordinate to the primary or more senior mortgage. This means that in the event of default or bankruptcy, the first mortgage must be paid out before the second mortgage. As a result, second or third mortgages often have higher interest rates to compensate for the additional risk.

 

Term: this is the length of your current mortgage contract. The mortgage term is the length of time you are committed to a specific lender at a specific interest rate. It ranges anywhere from 6 months to 10 years or greater.

 

Title: the legal right to, or interests in, a property. A legal term that describes the ownership of a property (i.e. who owns the property, what parties have legal interests in the property such as a lender, etc.)

 

Title Insurance: protects the buyer of the property if the seller did not have full legal rights to sell and transfer the title of the property to the buyer.

 

Variable-Rate: this is an interest rate that is based on a lender’s Prime Rate. It is often 

expressed as “Prime +/- a percentage.” Generally, the “+/- a percentage” does not change – it is fixed. However, the Prime Rate may change during your mortgage term. This means you will have a higher interest rate in the event the Prime Rate rises, but you may also benefit from lower interest rates in the event the Prime Rate decreases. 

 

For example, Zach has a variable-rate mortgage that is based on Prime minus 1.00%. The Prime Rate is 3.00%. His effective interest rate is therefore 2.00%. Next spring, Zach’s bank increases the Prime Rate to 5.00%. Zach’s new interest rate is now 4.00%.