Mortgage terms you should know before starting:
The length of time allotted to paying off a loan – in home-buying terms, the mortgage. Most maximum amortization periods in Canada are 25 years.
GROSS DEBT SERVICE
The gross debt service (GDS) is the percentage of your total monthly income that goes toward housing costs. Canada Mortgage and Housing Corporation (CMHC) recommends your GDS remains at or below 35%.
A mortgage pre-approval helps buyers understand how much they can borrow before going through the mortgage application process. This allows you to make an immediate offer when you find a home, since you know how much you'll be approved for with this lender, and locks in the current interest rate for a period of time insulating you against near-term rate increases.
NOTE: Pre-approvals have a short life span and may need to be updated.
The down payment is the amount of money paid-up front for a property, in order to secure a mortgage. In Canada, the minimum down payment is 5% of the property’s total purchase price. The selling price, minus the deposit and down payment is the amount of the mortgage loan.
The difference between a home’s market value and the amount owing on the mortgage. This is the portion of the home that has been paid for and is officially owned.
A fixed-rate mortgage guarantees your interest rate and for a pre-determined amount of time, typically five years. Your payments stay the same for the mortgage’s term so you will not pay more even if interest rates increase over time. When the term expires, you have the option to stay with the same lender or switch to a different one.
Your interest rate is locked in for a specified period called a term.
VARIABLE RATE MORTGAGE
A variable rate mortgage fluctuates with the prime rate. Your monthly payments remain the same, but the proportion of your payment going toward principal versus interest can change.
Note: The rate of interest you pay may change if rates go up or down.
Requires a down payment of 20% or more of the property’s value. You are not required to get mortgage default insurance with a conventional mortgage.
Example: (Canada Mortgage and Housing Corporation, CMHC)
The mortgage cannot be paid off early without paying a prepayment charge.
A mortgage that can be paid off at any time during the term, without having to pay a charge. The interest rate for an open mortgage may be higher than for a closed mortgage with the same term.
A high-ratio mortgage is a mortgage where the borrower has less than 20% of the home’s purchase price to make as the down payment. A high-ratio mortgage with a down payment between 5% and 19% of the purchase price requires mortgage loan insurance. In Canada, 5% is the minimum amount required for the down payment.
A short-term loan designed to “Bridge” the gap for home buyers who have purchased their new home before selling their existing home. This type of financing is common in a seller’s market, allowing home buyers to purchase without having to sell first.
Check with your mortgage broker to ask about any penalties that you may incur if you payout your mortgage amount early or prior to the term being up. Sometimes a financial institution may waive such penalties if you are taking out a mortgage on a new property.
There is Mortgage Life Insurance, which is designed to ensure the repayment of your mortgage, should anything happen to you. The there is also Mortgage Loan Insurance, which protects the lender against mortgage default.
MORTGAGE LOAN INSURANCE
Mortgage loan insurance is required if your down payment is less than 20 percent of the purchase price of the home, mortgage loan insurance is required. It protects the lender in case of payment default.
Be Prepared, Stay Informed!
When you're ready, choose wisely!
DISCLAIMER: All information displayed is believed to be accurate but is not guaranteed and should be independently verified. No warranties or representations are made of any kind.