A Glossary of Mortgage Terms
Every industry has its own language and terms. These words and phrases can be confusing to anyone who is not part of a specific industry’s daily operations, and the mortgage sector is no exception.
To help you understand the terms, acronyms, and phrases extensively used when talking to a mortgage professional, Corina Murphy Mortgages - Premiere Mortgage Centre has created this handy reference guide. Here you’ll find valuable information allowing you to comprehend and communicate your mortgage needs effectively.
Amortization: The amortization is the time it takes to pay off your mortgage to a zero balance (essentially the life of the mortgage). In Canada, typical amortizations start at 25 or 30 years, but some lenders will offer 35-years. The lower the period, the higher your payment will be.
HELOC: HELOC stands for Home Equity Line of Credit and is similar to a regular credit line. However, the rate is generally .50 - 1.00 above the current prime rate, and payments per month get typically calculated on interest only. HELOCs are registered on your property and are done so by way of a collateral charge.
Standard Charge: A standard charge will outline the terms of a mortgage, and the responsibilities of the lender, and the borrower. It’s similar to a loan where the lender provides funds over a particular period, and at a specific rate. Consequently, when the balance of the loan gets paid, the charge is removed or discharged.
Collateral Charge: Unlike a standard charge, this charge is readvanceable, and is typically used for HELOCs but lenders can also register a mortgage as a collateral charge. These charges are not generally transferable and are registered at a much higher interest rate to allow future rate fluctuations. Therefore, the lender will let you borrow more money after closing without you needing to pay a fee. You will still need to re-qualify, but typically a legal cost is not associated with accessing equity.
Insured Mortgage: These mortgages are for borrowers that have less than a 20% down payment. They are all stress tested and must get insured by one of the three Canadian insurers. These mortgages usually offer the lowest interest rates, but the borrower will pay a premium added to the mortgage. The insurance is to protect the lender against default and to lower their risk.
Insurable Mortgage: It generally offers the next best rate when compared to an insured mortgage. The characteristics of an insurable mortgage include properties with a purchase price of less than $1 Million, a purchase or transfer (no new money), it has a maximum amortization of twenty-five years, is qualified under the stress test, and is within 39/44% GDS/TDS.
Uninsurable Mortgage: These are mortgage refinancing properties valued at over $ 1 million and have an amortization exceeding twenty-five years. They generally come at a slightly higher interest rate than insured and insurable mortgages.
Loan-To-Value (LTV): LTV represents the percentage of the loan amount compared to the property’s value. This value also will determine whether or not you will pay a default insurance premium. Any LTV’s at 80% or higher will require default insurance, whereas LTV’s lower than 80% are not subject to the consumer paying the default insurance.
Default Insurance: Default Insurance is mandatory on any purchase where the client has less than a 20% down payment. When the client has less than 20% down payment, the mortgage is considered high risk, so it is government-regulated, and these types of mortgages are insured. The insurance is to protect the lender against default, and the consumer will also pay a premium, which gets added to the mortgage.
Interest Rate Differential: There are two types of penalties incurred when breaking the contract of a mortgage. One is a 3-month interest penalty, and the other is the Interest Rate Differential or IRD. It gets based on many factors, including the current rate you are paying on your mortgage, the balance owing, the amount of discount you received off your mortgage at origination, and the rate at the time to break the contract. It’s a real loss for the lender, and they never forgive these penalties.
Variable Rate Mortgage: Variable rate mortgages are ones in which the interest rate can fluctuate throughout the term. Lenders will set their variable rate based on the Bank of Canada prime rate. It is typically higher than the BoC rate, and they may offer a discount or an increase above the prime. Each time the prime rate changes, you are susceptible to a rate shift, and thus your payment can change.
Fixed-Rate Mortgage: Fixed-rate mortgages are mortgages in which the rate is locked in for the contract’s entire term. Regardless of whether or not rates change, yours will continue to stay the same until your maturity date.
Total Debt Service Ratio: It’s a percentage used by lenders to determine your shelter costs (mortgage principal and interest, property taxes, heat, and condo fees) plus all your other monthly debt obligations. It gets used to determine the maximum amount of debt you can comfortably carry and make mortgage payments. Most lenders require that this ratio be no more than 44%. However, if your credit score is on the lower side, you could be looking at a maximum ratio of 39%.
Gross Debt Service Ratio: This is the percentage that lenders use to determine what you can comfortably carry for shelter costs (mortgage principal and interest, heat, property taxes, and condo fees). It gets calculated by dividing the gross annual income and can be as high as 39% but may be lower if your credit score is small.
Land Transfer Tax: It’s a tax that is payable to the provincial or municipal government when purchasing a home. First-time buyers are eligible for rebates, but depending on where they buy, they may be subject to both taxes.
If you’re looking for the best mortgage broker in Mississauga, ON, reach out to the experts at Corina Murphy Mortgages - Premiere Mortgage Centre.
We serve clients across Oakville, Milton, Caledon, Vaughan, Halton Hills, Hamilton, St. Catharines, Streetsville, Meadowvale, Puslinch, Niagara, Brampton, Burlington, Orangeville, and Brantford, to name just a few places.
Our services include first time buyers, mortgage renewals, mortgage refinances, second homes, investment properties, and commercial mortgages. We also offer private mortgages, reverse mortgages, self-employed, home equity loans, and debt consolidation.