Mortgages are specialized multi-year loans. They represent the single largest asset (a home) and financial obligation (the loan itself) that many Canadians will own and manage in their lifetimes.
From that perspective, it makes sense that there’s a lot of specific terminology and jargon around these loans.
However, mortgages are very common across Canada. The Canada Mortgage and Housing Corporation (CMHC) offers a mortgage data dashboard with a variety of available statistics. In 2022 alone, 2 million new home loans were originated by lenders.
With so many people taking out mortgages each year, it’s important that everyone has a clear picture of the unique words and phrases used to discuss them.
Keep reading to find the first half of our helpful mortgage vocabulary list, with simple definitions in plain language. Keep an eye out for part two, where we’ll define even more common terms related to home loans.
Mortgage Vocabulary: Important Words and Phrases for Home Loans Defined
Amortization
While you may not have come across the word itself before, amortization has a straightforward meaning in the context of mortgage lending. The easiest way to think of “amortization” is to think of the lifespan of the loan.
Amortization refers to the schedule of interest and principal payments that you make on your mortgage. The payments are typically of an equal value e.g. $500/month. Nerdwallet explains that other common loans like car loans are also amortized. Your amortization schedule — the length of the loan —can both influence your payment amount and the total amount you owe on your home.
Blended Rate
As the loan matures, many homeowners look for opportunities to reduce the cost of their mortgage payments. One option available is to combine the interest rate of your existing mortgage with the interest rate of a new mortgage—thus creating blended interest rate.
Investopia explains that a blended interest rate on a loan is the combination of a previous rate and a new rate. Blended rates are usually offered through the refinancing of existing loans that have a higher interest rate than the old loan’s rate, but lower than the rate of a brand-new loan. [investopia.com]
The benefit of this approach is that you avoid breaking your agreement and paying a potentially steep prepayment penalty.
Blended Repayment
A blended repayment includes funds that go toward the mortgage’s principal and its interest. Most home loans shift from the repayment primarily going toward interest at the beginning to a focus on the principal at the end.
Blended repayments are a way of repaying a loan that sets equal regular payments of principal and interest (blended) over an agreed-upon amortization period. [BDC.ca]
Buy-Down Option
A buy-down is a mortgage financing technique where the buyer attempts to get a lower interest rate for at least the first few years of the mortgage.
This option allows you to pay more money upfront to reduce the interest on your loan. That initial cost is offset over time by reducing interest, and therefore the total amount you need to pay back.
Closed-Term Mortgage
Closed term mortgages are a great choice if you aren’t planning to pay off your loan in the short term. That’s because with a closed mortgage, you can face penalties for paying off all or part of your mortgage before your term is up. This option, however, has a much lower interest rate than that of open mortgages making it the more common mortgage choice in Canada.
At Innovation, you do have prepayment options available on this type of mortgage.
Canada Mortgage & Housing Corporation (CMHC)
CMHC is Canada’s national housing agency. Find out more about CMHC by visiting www.cmhc-schl.gc.ca.
Costs: Common Residential Mortgage Costs & Fees
Hidden fees are a thing of the past. For full transparency, here is a list of the most common fees associated with mortgage applications* (*subject to change):
- Appraisal fee: The cost of having your real estate appraised. Depending on location and the type of mortgage, this is generally between $300 - $800. This upfront fee is charged to the member and can be requested by your Lender (Mortgage Specialist) and the Credit Underwriting team.
- Credit Bureau Checks: At Innovation, we currently pull your credit bureaus from TransUnion and Equifax. Solo applicants can expect to see a fee of $5.80; joint applicants a fee of $10.94. There may be additional fees for each borrower added to the application. Each bureau pull is valid for 90 days.
- Personal Property Registration (PPR) Search: To ensure we have the correct assets on file, we conduct a personal property registration search on each applicant. The cost is $18 per person.
- Application Fee: All Residential Consumer Mortgage applications are subject to a $100 application fee.
- Closing Fees (including legal fees): You’ll be required to show approximately 1.5% of the purchase price for closing costs. The legal fees (variable cost) are charged by your lawyer/solicitor to transfer land titles and complete the mortgage documents.
- Mortgage discharge fee: If you choose to sell your home or transfer your mortgage to another financial institution, you may be subject to a $250 Mortgage Discharge Fee.
- Administration Fee: Should you terminate your mortgage loan mid-term, you may be subject to paying an Administration Fee of $50.
Consolidation
A debt consolidation loan is when you take out a loan to pay off your other debt. The new loan is typically at a lower interest rate than your other smaller loans. In regard to a mortgage, you can leverage existing equity in your home to help pay down debts such as credit cards, student loans, and lines of credit. The goal is to have a lower overall interest rate, increase ease of bill payments, and improve the likelihood you’ll settle debts faster.
Conventional Mortgage
A conventional mortgage is a loan-to-value ratio mortgage where you pay 20% down (or more) of the property’s value and get the loan value equivalent to at least 80% of the property purchase price.
Convertible Option
A convertible mortgage option allows you to change your mortgage type between a closed-term and open-term. The need for a convertible option is typically decided at the beginning of a term. If a homeowner wants to start with an open mortgage and then lock into a closed mortgage, a convertible mortgage is the right choice. Benefits could include the ability to save money, avoid penalties, flexibility, and potentially lower down payment requirements.
Default Insurance
Required by the Canadian Federal government, default insurance is required on High Ratio mortgages with down payments less than the minimum down payment of 20% of the purchase price. Default insurance is obtained through either CMHC or SAGEN and often the premium can be built into your mortgage payments by your lender (Mortgage Specialist). Although this insurance protects the lender, it does provide a benefit to the borrower. It’s intended to make homeownership goals a reality by reducing the initial amount required for a down payment.
Down Payment
A down payment is the amount of money you put towards the purchase of a home. This amount is deducted from the purchase price. Your mortgage covers the remaining funds (plus interest) required to purchase the home. Down payments may come from savings, investments, gifted funds or the sale of another property. Speak to your lender today if you require further options or clarification.