Mortgage 101: The key terms you need to know

Making sense of home buying and mortgages can feel like learning an entirely new language. To help you through this process, we’ve put together a helpful guide of the key terms you need to know. 

Mortgage

Put simply, a mortgage is a legal agreement between you and your mortgage provider where your mortgage provider loans you the funds needed to purchase a home.

Down payment

Your down payment is the amount of money you initially put towards the purchase of your home with the remaining amount being covered by your mortgage. 

To qualify for a mortgage in Canada, you need to put forward a down payment that is at least 5% of the price of the home, or a minimum of 20% if your home will cost over $1 million. However, it’s important to note that any down payment under 20% of the price of the home requires mortgage loan insurance.

Mortgage Insurance

You are required to have mortgage insurance if your down payment is under 20%. Mortgage loan insurance protects your mortgage provider from potential risk in case you can’t make your payments, while also allowing you to purchase a home with a smaller down payment, as low as 5%. You can often secure your mortgage loan insurance through CMHC, Sagen, or Canada Guaranty.

Mortgage principal

Your mortgage principal is the amount you borrow from your mortgage provider when you initially take out a mortgage. Your monthly payment will include your principal as well as additional costs such as interest, insurance, and taxes.

Interest rate

Lenders, including mortgage providers, typically charge you a fee to loan you money. This fee is called the interest rate on the loan. For mortgages, your interest rate is a percentage of the total amount you owe your mortgage provider. Interest rates can rise and fall over time.

Interest

Your payments for your mortgage will include your mortgage principal as well additional costs such as taxes and interest. Interest is the accumulation of the fee charged by your mortgage provider, or the interest rate in other words, over time.

Prime rate

A prime rate refers to the interest rate that’s set by the Bank of Canada. Your mortgage provider uses the prime rate to determine the interest rates issued for different mortgages. Payment Frequency

Payment frequency

Payment frequency refers to how often you make mortgage payments. Mortgage payments are typically made on a weekly, biweekly, or monthly basis. The frequency is set with your mortgage provider when you apply for your mortgage.

Prepayment/lump sum payment

A prepayment, also referred to as a lump sum payment, is a payment you make toward your mortgage that is in addition to your regular mortgage payment. A prepayment/lump sum payment helps to bring down your outstanding balance and pay your mortgage off at a faster rate. You’ll just have to check your mortgage contract to see how often and how much you can pay as a prepayment

Amortization period

An amortization period is the total length of time it takes to pay off a mortgage in its entirety. This includes the principal amount and interest. Amortization periods can be shortened by paying a higher amount for a shorter period of time or a larger amount over a longer period of time. They generally  range from 5 to 30 years.

Mortgage term

A mortgage term is the length of your contract with your mortgage provider. Mortgage terms can range from 1 to 10 years. 

Maturity date

The end of a mortgage term is the maturity date. Once you reach your maturity date, you either pay off the entire mortgage or renew your term with your mortgage provider.

Mortgage renewal

A mortgage renewal is the process that occurs when you’ve reached the end of your mortgage term and need to negotiate another term with your mortgage provider if you can’t pay the mortgage off in full.

Refinancing

Refinancing refers to the process of renegotiating an existing mortgage before the end of the mortgage term (the maturity date). Refinancing involves renegotiated terms and is typically used to help a homeowner consolidate debt or access equity in the home.

Home equity

Home equity is essentially the total amount you actually own of a home and is calculated by subtracting the amount you owe on a home from the market value of your home. As your mortgage is paid down, your home equity goes up. 

Gross Debt Service (GDS) ratio

Gross debt service (GDS) ratio is a calculation used by your mortgage provider to determine the maximum amount you can afford to pay for your home each month. It is calculated by dividing your housing costs (including expenses such as your total monthly mortgage, property taxes, utilities, and maintenance fees, if applicable) by your pre-tax income.

Total Debt Service Ratio (TDSR)

Your total debt service ratio (TDSR) is the percentage of your monthly household income that goes toward all your debt (including expenses such as your car payments, credit cards, or other loans). 

Mortgage pre-qualification

Two terms that people frequently mix up are mortgage pre-qualification and pre-approval. Both are early steps in the mortgage process and home buying journey, but have a few key differences.

A mortgage pre-qualification usually happens first and occurs when a mortgage provider assesses your financial information, including your total debts, income and assets, and provides you with an estimate of the maximum mortgage you’d likely qualify for. It is important to note that when it comes to taking out a mortgage, you will be subject to the Canadian stress test, which are qualifying criteria that can prove you can afford your monthly mortgage payments, should interest rates rise. 

A pre-qualification isn’t the most accurate assessment, but it is an incredibly helpful tool in guiding your home search.

Mortgage pre-approval

A mortgage pre-approval is a commitment, that is always  conditional, given to you by your mortgage provider of the exact amount your provider will loan you for a mortgage. 

A pre-approval is a much more thorough process to assess your finances, and includes a credit check. It’s important to remember a pre-approval does not guarantee a loan, but it is an important step in the process and can help you in securing a loan.

Talk to our advisors if you have questions about how pre-approvals work or to start the process.

Qualifying rate

A qualifying rate is the interest rate your mortgage provider uses to determine if you qualify for the mortgage you’ve applied for.

Your mortgage provider will use the rate that’s set by the Bank of Canada–generally the 5-year fixed-rate–to assess whether you can afford to make the monthly payments that would be set out by the terms of the mortgage you’ve applied for and ensure it’s still affordable if interest rates increase.

Fixed-rate mortgage

In a fixed-rate mortgage, your interest rate stays the same for the entire term of your mortgage term regardless of whether interest rates are raised or lowered, or in other words, regardless of what the prime rate is.

Variable-rate mortgage

The alternative to a fixed-rate mortgage is a variable-rate mortgage, and generally there are two types. 

In an actual variable-rate mortgage, your monthly payment doesn’t change, but what you pay within the monthly payment towards your principal and interest can, based on whether the interest rate goes up or down.  

Adjustable-rate mortgage (ARM)

An adjustable-rate mortgage is another type of variable-rate, where your monthly mortgage payments could fluctuate based on whether Canada’s prime rate goes up and down. While this tends to give you more flexibility and to take advantage of the market when interest rates fall, it’s also important to know that your interest rates could spike based on the Bank of Canada.

Trigger rate

A trigger rate is unique to each mortgage and refers to the point where your monthly payment will begin going entirely to your interest, leaving your principal untouched. This generally affects those with a variable-rate mortgage, where the monthly payment stays the same but the amount within the payment is adjusted to pay off more of the interest than the principal. When you start to approach your trigger rate, or the point where your payment can’t cover your interest rate, your mortgage provider will contact you to renegotiate your mortgage terms.

Land transfer tax

Land Transfer Tax is a tax set out by provincial governments when you buy a home or land in Canada. The land transfer tax is an additional cost on top of the price of a home, and is included in your closing costs.

Closing costs

Closing costs are the additional fees on top of the price of a home to complete the purchase of a home like the cost of a real estate lawyer. 

Have questions? Our advisors are here to support you on every step of the way and simplify each part of the process. Apply with Pine today for a mortgage solution that’s right for your unique needs–no extra hidden or extra fees, hassle, or stress.