The Homebuyer Glossary
Have some financial terms that you’re looking to learn more about or just looking to brush up on your homebuying and financial literacy? You’ve come to the right place!
The period or total number of years it will take to pay off your mortgage completely. Amortization periods typically range from 15 to the maximum of 25 years. The longer the amortization, the lower your monthly payments, but you’ll end up paying more interest over your mortgage length. A shorter period results in a lower amount of total interest paid, but higher monthly payments. See how we can help you lower your monthly interest payments.
The appraised value of a property is the fair market value as determined by a licensed and qualified appraiser.
Adjustable Rate Mortgage
In an adjustable rate mortgage, both the interest rate and monthly payments fluctuate based on market rates. As the interest rate adjusts up or down, payment amounts adjust accordingly so that the amortization period remains the same. This method should be used carefully, as changes in payment amounts could present an issue for those on a tight budget.
Assets and Liabilities
Assets include your checking and savings account balances, RRSP and investment balances, vehicles, and property you own. Your liabilities may include another mortgage in your name, credit card debt, and any other outstanding loans. When you apply for a mortgage, your assets (less your liabilities) are taken into account to determine the amount you can afford towards a mortgage on a monthly basis.
Borrowed Down Payment
Borrowed down payment (often referred to as a Flex Down Payment) is a way for an individual to buy a home using borrowed money. At Arch we can help you secure your down payment so that you won’t need to borrow from other 3rd party sources or end up paying mortgage loan insurance.
Bridge financing is a form of credit that bridges the time between when you need financing and when long-term financing can be secured. Often used as funding between the sale of one property and the purchase of another, this short term solution is best used with the help of a professional mortgage broker.
These are costs that are associated with completing the mortgage transaction. Closing costs typically include: lawyer fees, title insurance, appraisal fees, fire insurance and home inspection fees.
This represents the day home ownership transfers from the seller to the buyer and is stated and agreed to by all parties on the sale contract.
The number of times per year that the interest rate is compounded. In Canada, mortgage interest rates are compounded semi-annually, or twice per year.
Condo fees consist of the monthly payments collected that cover a resident’s shared expenses for the upkeep of all common areas.
Cash Back Mortgage
A cash back mortgage is an option that is used in fixed rate mortgages, which offers the buyer a lump sum of cash at the time of their closing. This helps the buyer cover expenses involved with the closing such as moving, lawyer’s fees, or even renovations to your new home.
A closed mortgage places restrictions on the amount and frequency at which you may make lump sum payments on the principal of your mortgage loan ahead of schedule. If additional payments are made, there may be penalties involved should you choose to pay off your mortgage prior to the end of your term (for example, if you sell the home).
This common type of mortgage loan does not exceed 80% of the property value (the lesser of the purchase price or the appraised value). For this type of mortgage, you must have a minimum of 20% for a down payment.
Your credit score is a number that represents your creditworthiness. Your credit score will ultimately impact which mortgage products (and other loans) you qualify for and what interest rate you can obtain.
This is the amount of money that a homebuyer must have available to secure a mortgage, generally ranging from 5%-20% of the purchase price of the home.
Homebuyers may make their down payment from a variety of sources, including but not limited to:
- Borrower’s savings
- RRSP withdrawal
- Gifted funds from family
- Proceeds from the sale of another property
- Funds borrowed against proven assets
- Sweat equity
- Cash back from lender
- Investment from Arch (the new, smarter approach)
Fixed rate mortgage
In fixed rate mortgages, the interest rate is fixed (or locked in) for a specific amount of time being the length of your term. Statistically speaking, fixed rate mortgages are often higher than variable rate, but you’re paying for peace of mind and certainty if lending rates inflate.
A Home Equity Line of Credit (HELOC), can be your only loan against your home, or can even function as a second mortgage that works in a similar way to a line of personal line of credit. You must have at least 35% of equity in your home in order to obtain a HELOC.
A high-ratio mortgage is one that is more than 80% of the home’s value (the lesser of purchase price of appraised value), up to 95%. This type of mortgage must be legally insured (through mortgage loan insurance) against borrow default. The insurance premium may be added to the loan or paid in advance and can be quite expensive. In other words, where the down payment provided by the borrower is less than 20% of the home’s value.
This is the cost of borrowing money for a period of time. Interest is typically paid to the lender in installments along with the repayment of the principal loan amount.
This is the rate at which you pay interest, calculated as a percentage of the principal amount, charged by the lender. In Canada, interest rates on mortgages are compounded twice per year.
Investment Property Mortgage
An investment property mortgage is specialty financing that helps facilitate real estate investment. Typically, terms for investment property mortgage are different than those for traditional mortgage properties, so it’s wise to work with a mortgage broker when obtaining this type of mortgage.
A lien is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation.
Leasing is a way to obtain use of a property for a specific period of time. Essentially, a lease is a contract between an owner and a renter, sometimes with the option to purchase the property at the end of the lease period.
Loan to Value Ratio (LTV)
The ratio of the value of the mortgage loan to the appraised value or purchase price of the property (whichever is less). For example, if someone purchased a home for $400,000 and had $80,000 as a down payment, the mortgage would be $320,000, or 80% of the value of the home (therefore an 80% LTV).
An employee of a lending institution that acts as the liaison between that lender and the borrowers (it’s customers that are applying for a loan).
The maturity date is the end of the mortgage term. At this time you may choose to repay the balance of the principal or renegotiate the mortgage using current interest rates.
A mortgage is a type of loan that uses the home you buy as security. A mortgage loan is a legal document against the title of your property.
This is the amount that a mortgage borrower can make (or afford) on a monthly basis towards a mortgage. It’s generally based upon income, expenses, and the proposed monthly payment.
A mortgage broker is an intermediary between a borrower and a lender. This person must be a Licensed Mortgage Associate for at least two years before becoming a Mortgage Broker.
Mortgage insurance is required by the lender on a high-ratio mortgage. In the event that a borrower defaults on their loan, mortgage insurance protects the lender. There are three mortgage insurers in Canada: AIG, Canadian Mortgage and Housing Corporation (CMHC), and Genworth.
Learn how to avoid paying mortgage insurance by securing down payment investment through Arch.
Mortgage Life Insurance
This type of insurance will pay a mortgage off in full should the homeowner die or become disabled. You may choose to add the insurance premium to your monthly mortgage payments.
The term is the length of time you have agreed to a certain interest rate and payment schedule. It can range from six months to 10 years, but homebuyers tend to go for terms of three or five years. Ten-year terms have become more popular recently, because fixed mortgage rates are at historic lows.
Notice of Assessment
Also known as an NOA, this is the summary form sent to you from Revenue Canada after your income taxes have been filed. Your NOA specifies what you claimed on your taxes from the previous year, as well as the amount of taxes you currently owe, or the amount of money that you will be receiving as a tax refund.
An Open Mortgage allows the homeowner the option to pay off their entire mortgage or make large lump sum payments without penalties or additional fees. Open mortgages may be good choices for homeowners who plan on selling or require shorter mortgage terms. Keep in mind that interest rates are often higher in open mortgages.
The overnight rate is the interest rate at which large banks borrow money, short term, among themselves.
This is the frequency at which the homeowner makes their mortgage payments. Payment options include monthly, semi-monthly (twice a month), bi-weekly (every other week), and weekly payments. More frequent payments generally results in lower interest costs over the life of your mortgage and can shorten your mortgage term significantly.
A private mortgage is offered by a privately-owned corporation or an individual, as opposed to a conventional lender.
A portable mortgage is a type of mortgage that permits the borrower to transfer their mortgage balance to a new property, with the same lender without penalties associated.
A feature of a mortgage that allows the borrower to transfer their mortgage to a new property if they move before their mortgage term is up (without penalties).
A pre-approved mortgage, otherwise known simply as a “pre-approval”, qualifies you for a mortgage loan amount before you start looking for houses. Pre-approvals also acts as a rate hold, guaranteeing you today’s interest rates until up to 120 days in the future.
If you “break” (or pay off) your mortgage before your term is up, you’ll likely have to pay a prepayment penalty. This penalty is typically three months’ interest payments, however this will be determined by your lender.
Some mortgages and lenders allow you prepayment privileges. Examples of these include: doubling up mortgage payments, paying off a certain portion of your mortgage principal per year, or increasing your monthly mortgage payments by a certain percentage.
The amount of money borrowed and/or still owing on a mortgage. For example, if your mortgage was $400,000 and you’ve already paid $100,00 (no including the interest), the remaining balance of $300,000 on your mortgage loan is the principal.
Prime rate or the prime lending rate is the annual interest rate Canada’s major banks and financial institutions use to set interest rates for variable loans and lines of credit, including variable-rate mortgages. The prime rate is primarily influenced by the policy interest rate set by the Bank of Canada (BoC), also known as the BoC’s target for the overnight rate. You can view the current prime rate in Canada here.
Property Tax Assessment
A property tax assessment is a method of placing value on real estate for the purpose of taxation.
A legally binding document stating the buyer’s intention to purchase a home from the seller provided that certain conditions be met such as: condition of financing, condition of a home inspection, etc.
A rate lock refers to an agreement between a mortgage lender and a borrower to fix a certain interest rate for a number of days between the issuance of a mortgage approval and closing of the real estate purchase and mortgage loan.
Real Estate Agent
An individual who is authorized to act as an agent for the sale of real estate on behalf of the property owner (seller).
Real Estate Appraisal
An appraisal is a report prepared by a real estate appraiser estimating the value of a home or property that states features/properties of the home. Lenders will often require appraisals as a way to verify that the home has been purchased at fair market price, to determine market rates for rent, ensure the home meets their standards, and more.
Refinancing a mortgage is when the buyer (or mortgage loan holder) pays off an existing mortgage and arranges a new mortgage, often with a different lender.
A reverse mortgage allows homeowners to take money from their home equity, tax free, without have to pay monthly mortgage payments. In other words, homeowners are selling equity in their home as a way to secure a loan. Unlike a regular mortgage that dwindles away as you pay it off, this type of loan rises over time as interest and loan fees accrue.
A variable rate mortgage is one in which payments are fixed, but the interest rate will fluctuate with changes in the Prime Rate. When rates go up, a larger portion of the payment goes toward interest. When rates go down, more of the payment goes toward principal.