Mortgages can be confusing, especially for a first-time home buyer! Below is a glossary of different mortgage terms to help you better understand how they work. Our goal is to help educate you or offer a resource that will serve as a useful reminder!
First, the difference between a mortgage and a loan:
Not all loans are mortgages, but all mortgages are loans. A mortgage is a type of loan that’s secured with real estate. A loan is strictly between a lender and a borrower (mortgagor).
The Lender: The financial institution or individual willing to provide funds to secure real estate, this can be banks, mortgage brokers, insurance companies and individuals.
Mortgagor/Debtor/Property Owner: Person either purchasing or requiring funds
Amortization: It is the length of time it takes to pay off a mortgage, including interest, it may be between 5 and 30 years. For a new mortgage, the amortization period is usually 25 years.
CMHC (Canada Mortgage and Housing Corporations): Provides mortgage default insurance for high ratio mortgages. A high-ratio mortgage is less than 20% of the property value, this insurance is mandatory for most high-ratio mortgages.
Credit Report: a record of your credit history including current and past financial debts up to 7 years. It is used by a lender to help decide whether to provide the mortgage or not and at what rate to provide the mortgage.
Mortgage Insurance: It covers your mortgage payment or reduces your mortgage in the event of death, critical illness, or disability. This insurance can be provided by the creditor/lender or you can purchase it independently. This is important because debt ratios measure your ability to repay a mortgage by ensuring your debt doesn’t exceed a certain percentage of your income.
First-time home buyers task credit: It is a task credit made available for first-time home buyers by the Canadian Government, for full information visit the Canada Revenue site.
Land Transfer Tax: It’s a cost you pay the government on the day you take possession of the house, the tax is calculated based on the price of the property.
Home buyers plan: This is a Canadian Government program, that lets eligible individuals withdraw up to $35,000 from their RRSP to buy, build, or maintain their home, without incurring income tax on the withdrawal. The funds have to be replaced over the next 16 years.
Home Equity: Home equity is the value of your home, minus total outstanding debt, for example, if your property is worth $500,000 and the mortgage is $400,000, your home equity is $100,000
Interest: Is the money you pay to your lender for using the funds you borrow
Land transfer tax: is a closing (the day the property becomes your own) cost you pay the government on your closing date. The tax is calculated based on the property's purchase price.
Legal fees and disbursements: Legal fees and disbursements are part of the closing costs. Buyers and sellers pay them to their lawyers or notaries to close a purchase, sale or mortgage transaction. You should review all fees and other costs associated with your legal services
Term: A term is how long you commit to your mortgage rate, details and conditions with a lender. When a term ends, you pay off the mortgage or renew it for another term if your lender agrees. Terms range from 1 to 10 years, but 4- to 5-year terms are most
common. Not to be confused with the amortization period.
Maturity date: The maturity date is when your mortgage term ends. This is when you renew your mortgage for a new term if your lender agrees, or pay it off completely.
Mortgage broker: A mortgage broker works on your behalf and searches for the best mortgage deal among various lenders. When you accept a mortgage, the broker completes the application and applies for the loan on your behalf. Can also help with difficult or non-traditional mortgages.
Mortgage critical illness insurance: Mortgage critical illness insurance is optional insurance that can reduce or pay off your mortgage — up to a maximum benefit amount — if you’re diagnosed with any of the over 20 medical conditions. Can be purchased through the creditor or personally (more to your advantage)
Mortgage life insurance: Mortgage life insurance is optional insurance that can reduce or pay off your mortgage — up to the covered amount — in the event of your death. Can be purchased through the creditor or personally (more to your advantage)
Mortgage discharge: The day a homeowner looks forward to. When you pay off your mortgage in full, your lender issues a mortgage discharge document that's registered on title to your property. It certifies the property is completely free from that mortgage debt.
Mortgage pre-approval: With mortgage pre-approval, you're asked questions that closely match those of a full mortgage application. The lender does a credit check. The lender pre-approves you for a maximum amount and gives you a mortgage pre-approval certificate. A very useful tool and document to have when house hunting or about to make an offer to purchase.
Mortgage pre-qualification: NOT TO BE CONFUSED WITH A MORTGAGE PER-APPROVAL. Mortgage pre-qualification is a quick assessment process. The lender assesses your financial information, including debt, income and assets. You get an estimate on the mortgage amount you may be approved for. If you're pre-qualified, your lender has only done a basic review of your finances. You must still provide documents and more financial details before getting pre-approved for a mortgage.
Mortgage principal: Mortgage principal is the amount of money you borrow from a lender. If a mortgage is for $250,000, then the mortgage principal is $250,000. You pay the principal, with interest, back to the lender over time through mortgage payments.
Property tax: You pay property tax to your municipality for services like garbage collection, policing and fire protection.
Mortgage statement: You get a written record of your mortgage status, often on an annual basis, from your lender. The statement includes how much you paid in principal and interest to date, plus the remaining principal on the mortgage.
Property insurance: (also called home insurance): During your mortgage term, you need property insurance on your home. Property insurance covers the replacement cost of the home in case of fire, windstorms or other disasters. The lender needs proof of property insurance before releasing the mortgage funds.
Refinancing: Mortgage refinancing is a transaction that replaces an existing mortgage before it matures with a new one, on different mortgage terms. In some cases, prepayment charges apply.
Second mortgage: If you already own a property with a mortgage, you may be able to take out a second mortgage. You may want additional funds to renovate or for personal reasons. A second mortgage is one way to take money out of a home's growing equity. Second mortgages carry more risk than first mortgages and higher interest rates.
Title: Title is the ownership you buy when you purchase the property. Lenders require a clear "title" to the property before they release mortgage funds. Any issues or concerns about the property's title — fraud, survey errors, municipal work orders, zoning violations and encroachments — found through the lawyer's title search must be resolved before closing. Mortgages are "registered against title" or "registered on title" to protect the lender's financial interest in the property.
Title Insurance: Title insurance protects buyers and lenders from defects on titles discovered after closing. Title defects could include title fraud, survey errors, municipal work orders, zoning violations and encroachments. Consult with your lawyer about title insurance. If you buy title insurance, it's added to your closing costs.
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