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Learning Centre

Mortgage Definitions

As if buying a home weren't complex enough, somewhere along the way, someone thought it would be a good idea to create a whole new language to go with it.

Select a letter below to review:

Agreement of Purchase and Sale — A legal agreement that offers a certain price for a home. The offer may be firm (no conditions attached), or conditional (certain conditions must be fulfilled before the deal can be closed).

Amortization Period — The actual number of years it will take to repay a mortgage loan in full. This may go beyond the term of the loan. For example, mortgages often have five-year terms but 25-year amortization periods.

Appraisal — The process of determining the value of property, usually for lending purposes. This value may or may not be the same as the purchase price of the home. There is usually a fee to have an appraisal done.

Assuming a Mortgage — Taking over the obligations of the previous owner's (or builder's) mortgage when you buy a property.

Blended Payments — Payments consisting of both a principal and an interest component, paid on a regular basis (e.g. weekly, biweekly, and monthly) during the term of the mortgage. The principal portion of payment increases, while the interest portion decreases over the term of the mortgage, but the total regular payment usually does not change.

Canada Mortgage and Housing Corporation (CMHC) — A Crown corporation that administers the National Housing Act for the federal government and encourages the improvement of housing and living conditions for all Canadians. One potential source of mortgage insurance for high-ratio mortgages.

Certificate of Location or Survey — A document specifying the exact location of the building on the property and describing the type and size of the building including additions, if any.

Certificate of Search or Abstract of Title — A document setting out instruments registered against the title to the property, e.g. deed, mortgages, etc.

Closed Mortgage — A mortgage agreement that cannot be prepaid, renegotiated or refinanced before maturity, except according to its terms. A lender may permit payout under certain circumstances but will levy a penalty charge for doing so.

Closing Costs — Costs that are in addition to the purchase price of a property and which are payable on the closing date. Examples include legal fees, land transfer taxes, and disbursements.

Closing Date — The date on which the sale of a property becomes final and the new owner usually takes possession.

CMHC or GEMICO Insurance Premium — Mortgage insurance insures the lender against loss in case of default by the borrower. Mortgage insurance is provided to the lender by CMHC or GEMICO and the premium is paid by the borrower.

Conditional Offer — An offer to purchase subject to conditions. These conditions may relate to financing, or the sale of an existing home. Usually a time limit in which the specified conditions must be satisfied is stipulated.

Condominium — A form of ownership in which the owner has title to a dwelling unit and owns a share of the common elements (such as elevators, hallways and the land).

Conventional Mortgage — Is a mortgage that does not exceed 80% of the lesser of the appraised value or the purchase price of the property. A mortgage that does exceed that limit (referred to as High Ratio – see below) must be insured against default.

Convertible Mortgage — A mortgage that you can change from short-term to long-term, depending on your financial needs.

Deed (Certificate of Ownership) — The document signed by the seller transferring ownership of the home to the purchaser. This document is then registered against the title to the property as evidence of the purchaser's ownership of the property.

Deposit — A sum of money deposited in trust by the purchaser when making an offer to be held in trust by the vendor's agent, broker, lawyer or notary until the closing of the transaction.

Down Payment — The amount of money (usually in the form of cash) put forward by the purchaser. It represents the difference between the purchase price and the amount of the mortgage loan. Down payments typically range from 5%–25% of the total value of the home.

Equity — Equity is the difference between the price for which a property could be sold and the total debts registered against it.

Fire Insurance — Before a mortgage can be advanced, the purchaser must have arranged fire insurance. A certificate or binder from the insurance company may be required on closing.

Firm Offer — An offer to buy the property as outlined in the offer to purchase with no conditions attached.

Fixed-Rate Mortgage — A mortgage for which the rate of interest is fixed for a specific period of time (the term). Foreclosure — A legal procedure whereby the lender eventually obtains ownership of the property after the borrower has defaulted on payments.

GE Capital Mortgage Insurance Company of Canada (GEMI) — A private mortgage insurance company, one potential source of mortgage insurance for high-ratio mortgages.

Gross Debt Service (GDS) Ratio — The percentage of gross income required to cover monthly payments associated with housing costs. Most lenders recommend that the GDS ratio be no more than 32% of your gross (before tax) monthly income.

High-ratio mortgage — Is the mortgage you obtain when you have less than 20% of the total purchase price to put down as your down payment. This type of mortgage must be insured through sources such as CMHC, GENWORTH, AIG. Borrowers pay the insurer an application fee and the insurance premium (which may be added to the mortgage).

Holdback — An amount of money required to be withheld by the lender during the construction or renovation of a house to ensure that construction is satisfactorily completed at every stage.

Home Insurance — Insurance to cover both your home and its contents (also referred to as property insurance). This is different from mortgage life insurance, which pays the outstanding balance of your mortgage in full if you die.

Inspection — The process of having a qualified home inspector identify potential repairs to the property you are interested in and their estimated cost.

Interest Adjustment Date (I.A.D.) — A date, usually one month before monthly mortgage payments begin, when interest on monies advanced before that date is calculated and must be paid by the borrower.

Interim Financing — Short-term financing to help a buyer bridge the gap between the closing date on the purchase of a new home and the closing date on the sale of the current home.

Land Transfer Tax — A tax that is levied (in some provinces, including Ontario) on any property that changes hands.

Leasehold Mortgage — A mortgage loan on a home where the building is on leased (rented) land. The lender takes an interest in the lease.

Legal fees and Disbursements — Some of the legal costs associated with the sale or purchase of a property. It's in your best interest to engage the services of a real estate lawyer.

Loan-to-Value Ratio — The ratio of the loan to the appraised value or purchase price of the property, whichever is less, expressed as a percentage.

Lump Sum Payment — An extra payment that you make to reduce the amount of your mortgage. Meridian Credit Union allows for a 20% lump sum payment annually.

Maturity Date — The last day of the term of the mortgage agreement. The mortgage agreement must then be renewed or the mortgage balance paid in full.

Mortgage — A loan that you take out in order to buy property. The collateral is the property itself.

Mortgage Life Insurance — This form of insurance pays the outstanding balance of your mortgage in full if you die. This is different from home or property insurance, which insures your home and its contents.

Mortgage Rate — The percentage interest that you pay on top of the loan principal. For example, you may take out a mortgage of $100,000 at a rate of 12%. Your monthly payments will consist of a portion of the original $100,000, plus 12% interest.

Mortgage Term — The number of years or months over which you pay a specified interest rate. Terms usually range from six months to 10 years.

Mortgagee — The lender

Mortgagor — The borrower

Moving Expenses — The cost hiring of packers, movers or renting a van.

Multiple Listing Service (MLS) — A computerised listing of the properties available in your area, including information and pictures of each property.

National Housing Act (NHA) Loan — A mortgage loan insured by CMHC.

Offer to Purchase — A legally binding agreement between you and the person who owns the house you want to buy. It includes the price you are offering, what you expect to be included with the house, and the financial conditions of sale (your financing arrangements, the closing date, etc.). The offer may be firm (no conditions attached) or conditional (certain conditions must be fulfilled).

Open Mortgage — A mortgage, which you can pay off, renew or refinance at any time. The interest rate for an open mortgage is usually higher than a closed mortgage rate.

P.I.T. — Principal, interest and taxes. Together, these make up the regular payment on a mortgage if you elect to include property taxes in your mortgage payments.

Porting — Transferring an existing mortgage from one home to a new home when you move. This is known as a "portable" mortgage. This allows you to move to another property without having to lose your existing interest rate. You can keep your existing mortgage balance, term and interest rate plus save money by avoiding early discharge penalties.

Pre-approved Mortgage Certificate — A written agreement that you will get a mortgage for a set amount of money at a set interest rate. Getting a pre-approved mortgage allows you to shop for a home without worrying how you'll pay for it.

Prepaid Property Tax and Utility Adjustments — The amount you will owe if the person selling you the home has prepaid any property taxes or utility bills. The amount to reimburse them will be calculated based on the closing date.

Prepayment Penalty —- A fee charged by the lender when the borrower prepays all or part of a closed mortgage more quickly than is set out in the mortgage agreement.

Principal — The amount of money borrowed for a new mortgage.

Property Survey — A legal description of your property and its location and dimensions. Your mortgage lender usually requires an up-to-date survey. If not available from the vendor, your lawyer can obtain the property survey for a fee.

Refinance — Increasing the amount of your current mortgage, at a new interest rate. The old mortgage(s) is paid off (discharged) from the proceeds of the new loan. This type of loan is also referred to as "equity take out."

Renewal — At the end of a mortgage term, the mortgage may "roll over" on new terms and conditions acceptable to both the lender and the borrower. This is known as renewing a mortgage. Otherwise, the lender is entitled to be repaid in full. In this case, the borrower may seek alternative financing.

Sales Taxes — Taxes applied to the purchase cost of a property. Some properties are sales tax exempt, and some are not. For instance, residential resale properties are tax exempt, while new properties with a purchase price up to $400,000 are taxed with GST, and those that surpass $400,000 are taxed with HST. Those homes above $400,000 are eligible for the maximum new housing rebate of $24,000 as part of the HST program. Always ask before signing an offer.

Security — In the case of mortgages, real estate offered as collateral for the loan.

Term — The length of time during which you pay a specific rate on the mortgage loan (i.e., the number of years in your mortgage contract). This is different than the amortization period. A mortgage is usually amortized over 20-25 years, with a shorter term (typically 6 months to 5 years). After the term expires, the balance of the principal then owing on the mortgage can be repaid or a new mortgage agreement can be entered with a new renegotiated interest rate.

Variable rate mortgage — A mortgage with an interest rate that changes with the market. The rate changes each month, meaning that the portion of your payment that goes towards interest may go up or down each month. But your total payment will stay the same.


Mortgage Tips

There's a lot to know when it comes to mortgages. Click here for some extra tips.
  • First time homebuyers can withdraw up to $25,000 from their RRSPs to put towards a down payment. And you can take up to 15 years to pay back this money into your RRSP, interest free.
  • The Cash Back option can help you reach your 5% down payment requirement.
  • If you have a down payment of more than 20% of the value of your home you will not have to pay mortgage insurance.
  • If you find you have a little extra pocket money, a mortgage that offers flexibility in payment options, without penalty, will let you use that money to pay down your mortgage faster.
  • One of the fastest ways to pay down your mortgage is to take advantage of Accelerated Weekly payments. In doing so, you are essentially making the equivalent of one additional monthly payment each year which will help pay off your mortgage faster.
  • First time home buyers should be pre-approved for a mortgage before they even talk to a real estate agent. Pre-approval gives you a realistic budget to shop for your new home. The rate is guaranteed for 120 days for newly constructed homes and 90 days for a re-sale home. So take some of the guess work out of buying your new home. A pre-approved mortgage lets you confidently present an offer when you do find the home of your dreams.

Mortgage Minute

Click below to listen to Meridian’s “Mortgage Minute” radio spots: