Commonly used credit-related terms explained
Refer to this alphabetized list of commonly used credit and borrowing terms to get a clearer understanding of what they mean.
Amortization: Amortization is the amount of time it will take to fully pay off the principal and interest on a loan or mortgage. Amortizations can range from 5 - 30 years. This is not the same as the term, which is usually shorter. For example, a secured loan could have a term of 5 years, and an amortization period of 25 years.
Appraisal: An appraisal is an assessment of a property’s value. An appraisal is typically used to determine the possible selling price of an item or property.
APR: APR stands for “annual percentage rate.” APR refers to the annual rate of interest that a borrower pays, including any fees or additional charges associated with the debt. If there are no additional fees or cost of borrowing charges, the APR and the interest rate will be the same. For example, sometimes a lender will show their posted rate: 4.84%, their special rate: 2.24% and their APR: 2.26%. (note: this doesn’t factor in compounding).
Asset: Any item of economic value owned by an individual, even if you still owe money on it.
Bankruptcy risk score: A score that predicts the likelihood a person will file for bankruptcy. These scores are used when assessing persons’ ability to repay a loan during the credit application process.
Bridge loan: A bridge loan is a short-term loan. You may need a bridge loan if you own a home, but need funds from the value of your existing home to close a deal on a new one. This loan is usually only available if you already have a signed, unconditional sale offer on your current home.
Co-borrower: An individual that is directly responsible for the debt and must receive benefit of the proceeds. A co-borrower might be used if the loan applicant doesn’t have the required income or the credit history needed to meet the loan requirements. This is not the same as a guarantor.
Collateral charge: A charge, or mortgage, is the document registered on title to secure a loan. A collateral charge may secure more than one loan or line of credit.
Conventional mortgage: A mortgage where the home buyer has a down payment of 20% or more of the purchase price of the property. A conventional mortgage isn't insured by CMHC or another mortgage default insurer.
Creditor insurance: When a borrower is approved for a line of credit, loan, or mortgage, they can purchase creditor insurance. This type of insurance can assist with repaying all, or a portion of, the debt in the event of death, disability, critical illness or loss of employment (as defined by the terms of the insurance agreement). Learn more about creditor insurance.
Credit rating: Each piece of credit history information in your credit file is assigned a rating by the credit grantor. A credit rating is an evaluation of your ability to repay the debt. Ratings can range from 1 to 9 (a 1 applies to all payments made on time, and a 9 for bills that were never paid or for an account that has gone bankrupt. The rating is also given one of four letters:
- “I” stands for installment, meaning fixed payments over a certain period.
- “O” is for “open,” meaning you have “opened” credit (a loan or line of credit).
- “R” stands for revolving, meaning payments are contingent on the account balance (i.e. a credit card).
- “M” stands for mortgage loan.
Credit report: A credit report outlining your credit history. It includes current and past debts, up to 7 years, and a record of payments made. A lender uses a credit report, among other details, to decide whether to approve or deny your credit application. In Canada, there are two credit-reporting agencies:
Credit score: A number included in the Credit Report that models your credit worthiness. Numbers range from 300 to 900 with higher scores representing better creditworthiness. Learn more about understanding your credit score.
Down payment: A down payment is the amount of money you put towards the purchase price of a property. Minimum down payments vary from 5% to 20%, depending on location and product type.
Equity: The difference between the market value of a property and the total debts registered against it.
Fixed rate loan: A fixed-rated loan has a set interest rate and payment amount that don’t change over the term of the loan. This is different from variable rate loan.
Gross Debt Service Ratio (GDS): GDS is a measure of your monthly housing costs. This includes mortgage principal and interest costs, plus property taxes, heating costs and if applicable, 50% of condo fees. The higher your GDS ratio, the more difficult it may be to get approved for credit. This is not the same as the Total Debt Service Ratio.
Guarantor: This is a person who is liable for payment of the debt if the borrower can’t make the payments. Typically, the guarantor does not receive the benefit of the proceeds, and unlike a co-borrower, doesn’t co-apply for the loan. The guarantor’s income is not needed to qualify for the loan.
Hard credit check: A hard credit check is typically recorded on your credit report whenever you apply for a credit card, loan or mortgage. It could affect your credit score because a large number of hard inquiries gives the impression that you are routinely seeking credit. This is not the same as a soft credit check.
High ratio mortgage: If your down payment is less than 20% of the purchase price, it’s considered a high ratio mortgage. These mortgages must be insured against default because they are a high-risk loan.
Installment loan: This is a loan where regular payments are made over a set period of time. The loan will have an interest rate, repayment term and fees, which will affect how much you pay per month. Common types of installment loans include mortgages, car loans and personal loans. An installment loan can be either fixed or variable rate.
Line of credit: A line of credit gives the borrower ongoing access to funds up to an approved limit. The borrower can use the funds however they like, and pay it off at any time. Interest is charged only on the amount used. Interest payments are mandatory, whereas principal is not. A line of credit may be unsecured or secured with collateral such as real estate, other property or investments. A line of credit is sometimes referred to as revolving credit.
Loan to Value (LTV): A loan-to-value ratio measures how much you owe on a property, against the value of that property. As you pay down the balance owing, the available equity increases and your LTV decreases.
Example: You put a deposit of $80,000 on a property that costs $400,000. This means your loan (or mortgage) amount is $320,000.
- Loan to value (LTV) = Loan amt divided by property value
- Loan amount = $320,000
- Property value = $400,000
- LTV ratio = 80%
Minimum payment: The minimum monthly amount required on a line of credit or a credit card. The minimum payment is a combination of principal and interest, or in some cases, interest only. A borrower must make at least the minimum payment for the credit facility to remain in good standing.
Overdraft protection: The extension of credit by a lending institution that allows withdrawals to exceed deposits in a bank account. By paying a small monthly fee, you receive protection should you become overdrawn on your account.
Prime rate: The annual interest rate that Canada's major banks and financial institutions use to set interest rates for variable loans and lines of credit, including variable-rate mortgages. When you apply for a loan or mortgage with a variable interest rate, your lender will give you an annual interest rate that’s tied to the financial institution’s prime rate. Learn more about interest rates.
Principal: The principal is the amount you owe, excluding interest. This applies to all forms of debt, whether it's a credit card balance, a car loan, or a mortgage. If you borrow $3,000 to buy a car, for example, your initial loan principal is $3,000.
Refinance: A refinance involves revising and replacing the terms of an existing loan or mortgage. This could include the interest rate, payment schedule and other terms.
Renewal: When you get a mortgage, your contract is in effect for a specific amount of time, called the term. At the end of your mortgage term, you can renew your mortgage into a new term or pay it off in full.
Revolving credit: A type of credit with an approved limit that can be used as needed. Credit cards and lines of credit are examples of revolving credit, where you can access funds up to up to your credit limit. As you repay the outstanding balance, plus any interest, the amount of credit available returns to the determined limit. While this is more flexible than an installment loan, you are required to pay a minimum amount each month. Making at least the minimum payment is critical to maintaining a good credit rating.
Secured debt: A loan backed by an asset. A secured loan is considered less risky because if the borrower doesn’t make their loan payments, the financial institution can acquire the asset, sell it, and use the proceeds to cover the outstanding loan amount. An example of an asset used as security could be a house or a car. This is not the same as unsecured debt.
Soft credit check: A soft inquiry happens when you or a third party reviews your credit for non-lending purposes. This could occur when you review your own credit, or when a company offers you a new product or service. This won’t affect your credit score, unlike a hard credit check.
Standard charge: A standard charge is registered on title in a document that includes the important terms of your mortgage loan, such as the principal amount, interest rate, term, payment amount, etc. A standard charge is registered for the actual amount of the mortgage, securing only the one mortgage loan.
Stress test: Lenders conduct stress tests as part of the credit application process. The purpose of a stress test is for Lenders to gauge whether an applicant will be able to continue to repay credit if circumstances with the applicant or economic environment change (e.g. interest rates rise). The Mortgage Stress Test, introduced by the federal government in 2017, is a type of stress test. Learn more about the mortgage stress test.
Total Debt Service Ratio (TDS): This is a measurement that financial lenders use to determine how much of your gross income goes toward your debt each month. Total debt includes housing costs (mortgage or rent payments), as well as property taxes, heating costs, condo or maintenance fees, and all other debt payments. This income-to-debt “ratio” will help the lender determine whether to extend credit to you. This is not the same as the Gross Debt Service Ratio (GDS).
Term: The term on a loan or mortgage is the period of time that the borrowing agreement is in effect. A loan term is usually between 6 months and five years. Term is not the same as amortization.
Unsecured debt: This is any type of debt that is not secured or backed by an asset. The lender approves a loan based solely on the borrower’s creditworthiness and commitment to repay the loan.
Variable rate loan: A loan with an interest rate that can vary over the course of the term, based on changing market interest rates. The rate is typically tied to the Prime rate. This is different from a fixed-rate loan.