Buying a home can be an overwhelming process, especially when faced with a seemingly endless array of mortgage terms and jargon. But fear not, Canadian homebuyers! We’re here to simplify the language for you with our essential glossary of mortgage terms.

So, whether you’re considering a fixed-rate mortgage, want to know the difference between a down payment and a mortgage loan, or are simply intrigued by the ins and outs of the homebuying process, our glossary will empower you to confidently navigate the world of mortgage terminology. Let’s simplify this language together and take the first step towards your dream home.

Down Payment

A down payment is the initial sum of money you contribute towards the purchase price of your home. It’s typically expressed as a percentage of the total cost. In Canada, the minimum down payment requirement varies based on the home’s purchase price. For instance, if the purchase price is below $500,000, the minimum down payment is 5%. If the purchase price is between $500,000 and $999,999, the minimum down payment is 5% for the first $500,000 and 10% for the remaining amount. For homes with a purchase price of $1 million or more, the minimum down payment is 20%.

Mortgage

A mortgage loan is the money borrowed from a lender to finance the purchase of a home. It’s a long-term commitment that is repaid over time, typically through monthly instalments. The loan amount is determined by several factors, including the purchase price of the home, the down payment amount, and the interest rate.

Interest Rate

The interest rate is the percentage charged by the lender for borrowing the money. It’s a crucial factor that determines the overall cost of your mortgage. There are two main types of interest rates: fixed-rate and adjustable-rate. A fixed-rate mortgage has an interest rate that remains constant throughout the loan term, providing stability and predictability in your monthly payments. On the other hand, an adjustable-rate mortgage (ARM) has an interest rate that can fluctuate over time, usually based on market conditions.

Amortization

Amortization refers to the process of gradually paying off your mortgage loan over time. It’s the length of time it takes to fully repay the loan, usually expressed in years. The longer the amortization period, the lower your monthly payments but the more interest you’ll pay over the life of the loan.

Term

The term is the duration of your mortgage agreement with the lender. It’s the length of time you are committed to a specific interest rate, payment schedule, and other terms and conditions. Mortgage terms typically range from one to five years, with the most common being five years. At the end of the term, you have the option to renew the mortgage, negotiate new terms, or pay off the remaining balance.

Pre-approval

Getting pre-approved for a mortgage is an important step in the homebuying process. It involves a lender assessing your financial situation and determining the maximum amount they are willing to lend you. Pre-approval gives you a clear idea of your budget, strengthens your offer when making an offer on a home, and helps streamline the final mortgage approval process.

Conventional Mortgage

A conventional mortgage is a type of mortgage that is not insured or guaranteed by the government. It typically requires a down payment of at least 20% of the purchase price. With a conventional mortgage, you have more flexibility and control over your mortgage terms and conditions.

High-Ratio Mortgage

A high-ratio mortgage is a type of mortgage that requires a down payment of less than 20% of the purchase price. Since the down payment is lower, high-ratio mortgages must be insured by a mortgage insurer, such as the Canada Mortgage and Housing Corporation (CMHC). The insurance protects the lender in case the borrower defaults on the loan.

Fixed-Rate Mortgage

A fixed-rate mortgage is a type of mortgage where the interest rate remains constant throughout the term of the loan. This provides stability and predictability in your monthly payments, as the amount remains the same. Fixed-rate mortgages are popular among homebuyers who prefer to have a consistent payment amount.

Open Mortgage

An open mortgage is a type of mortgage that allows you to make prepayments or pay off the entire loan without incurring penalties. This type of mortgage offers flexibility but often comes with a higher interest rate.

Closed Mortgage

A closed mortgage is a type of mortgage where prepayments or paying off the loan before the end of the term may result in penalties. Closed mortgages typically have lower interest rates compared to open mortgages and are suitable for homebuyers who do not anticipate making significant prepayments.

Annual Percentage Rate (APR)

The Annual Percentage Rate (APR) is a broader measure of the cost of borrowing, as it takes into account not only the interest rate but also any additional fees or charges associated with the mortgage. It provides a more accurate comparison between different mortgage offers, allowing you to evaluate the overall cost of each option.

Prepayment Privileges

Prepayment privileges refer to the ability to make additional payments towards your mortgage, over and above your regular monthly payments. These extra payments can help you reduce your mortgage principal faster and save on interest costs. Prepayment privileges vary among lenders and mortgage products, so it’s important to understand the terms and restrictions associated with making prepayments.