Mortgage Terms

Mortgage terms :

If you do some homework and retain the services of a mortgage professional to guide you through the process, you will have a lot less stress and a lot more money in your pocket at the end of the day.

Mortgage Terms to Know!

What is a fixed rate mortgage?

The interest rate on a fixed-rate mortgage is set for a pre-determined term. The interest rate for various terms will vary, but the bottom line is that once you decide on a term the interest rate for that term will not change. This offers the security of knowing what you will be paying for the term selected.

What is a variable rate mortgage?

The key difference between a fixed rate mortgage and a variable rate mortgage is that the interest rate may vary during the term of your variable rate mortgage based on changes in a benchmark interest rate which is usually the “prime rate”. The prime rate is the interest rate charged by financial institutions to their most creditworthy customers. If the prime rate goes down, the interest rate on your mortgage will drop resulting in more money being applied to principal. If the prime rate goes up, the interest rate on your mortgage will also go up. This may result in your payment increasing to allow the increased interest component of your payment to be covered

What’s the difference between Pre-Qualification and Pre-approval?

Pre-qualification is the first step in obtaining the mortgage. However it is not the same as pre-approval as credit has not been reviewed, income has not been verified and the source of your down payment for closing has not verified. It’s a simple step where we examine your financial situation in terms of income and liabilities in order to establish how much you can borrow on a “qualified” basis. This is a very important concept at it allows you borrow money at the lowest available rate and allows you to qualify for high ratio mortgage insurance.

The two concepts that are relevant here are your GDS ratio, which is the ratio of the total carrying costs of the house you want to buy (including mortgage payment, realty taxes, and insurance) divided by your total family monthly income, and your TDS ratio, which is the ratio of your total monthly debt payments (including the carrying costs of your house) divided by your total family income.

Each of these calculations must now be adjusted by the applicable “stress test” imposed by the Federal government which may require that the interest rate used to be “bumped up” in the qualifying process to ensure that you have enough income to absorb unforeseen circumstances such as loss of employment or an increase in the interest rates on renewal.

As a rule, your adjusted GDS ratio cannot exceed 32%, and your adjusted TDS ratio cannot exceed 42%. These tests set out the parameters for the amount you can borrow, and this is why it is important to eliminate as much of your debt as possible before you apply for a mortgage.

Pre-approval refers to the verification of the applicant’s ability to borrow. At this stage, you must provide evidence to prove your income and the amount of the down payment you have available, and a credit check is done to confirm your credit score. A pre-approval gives a potential home-buyer the advantage of knowing how big a mortgage they will qualify for and the ability to use this information in negotiating the final selling price of a home.

Issuance of a Commitment: This is the final step. The Commitment is the formal contract prepared by the Lender that sets our the terms of the offer to finance. It contains the fine print of the mortgage offer and is usually quite lengthy. If you are purchasing, lenders will not issue a Commitment until you have entered into an Agreement of Purchase and Sale. This is why if you require a mortgage to close, you should always make the Agreement conditional on financing.

How much do I need for a down payment?

According to the guidelines of the Canada Mortgage and Housing Corporation (CMHC), if you are purchasing a home you must have a minimum down payment of at least 5% of the total cost of the prospective property. If you are refinancing, you can only refinance to 90% of the value of your home. If the amount of your down payment or equity is less than 20% of the value of the house, the mortgage is deemed “high ratio”. A high ratio mortgage is subject to a CMHC mortgage default insurance premium. However, this premium is usually added to the amount of your mortgage and can be repaid over the term of the mortgage. In addition, you can obtain a gift of funds from a family member to come up with down payment. You will, however, have to provide a “gift letter” to establish where the money has come from. In addition, maximum house price ceilings apply if you want to buy with only a 5% down payment. You can check the CMHC web-page or give us a call on this issue.

What happens if I’m not satisfied with a mortgage offer?

Don’t accept it. You have no obligation to accept any of the offers that are made to you by any lending organization. We will be more than happy to give you a competitive quote.  Simply access the Submit a Deal button on the top left corner of our homepage and we will usually get back to you within hours.

What is the difference between Term and Amortization?

The “term” of the mortgage should not be confused with the “amortization period”. The amortization period refers to the length of time that it will take for the mortgage to be paid in full, assuming the interest rate and payment remain constant.  The term is the period for which your current payment obligations are fixed. In other words, you may choose a five-year term and a 25-year amortization. This would mean that your interest rate, your payments, and your pre-payment options would be the same for the next five years. At the end of these five years, you would re-negotiate the term and the amortization would now be 20 years. Fixed rate Mortgages can be “closed” or “open”.

Open vs. Closed Mortgages

An “open mortgage” means you can pay down the mortgage whenever you want by making additional principal payments.  A “closed mortgage” means you cannot make any payments against the principal for the term of the mortgage. Most mortgages are not open.  However, most residential mortgages are a hybrid of these two:  the terms of the mortgage will give limited rights to prepay principal during the term without penalty.  However, if you want to pay off the mortgage in full before the end of the term you will have to pay a pre-payment bonus.  This is a very important term of your mortgage and you need to have full disclosure of this issue before signing on the dotted line

A full understanding of your pre-payment options is very important, as these rights can be used to reduce the amortization of one’s mortgage to allow the mortgage to be paid off more quickly.


Mortgage Portability

This is another very important concept.  It relates to your ability to move a mortgage from one property to another within having to pay a prepayment bonus to the mortgage company. You always want to have this right, as you never know when you may have to move for work or family related reasons.

Can I use my RRSP for a down payment?

Today, about 50% of first time home buyers use their RRSP savings to help finance a down payment through the federal Home Buyer’s Plan. The limit you can take out for this purpose $25,000.00 per person.  You then have 15 years to repay your RRSP.   To qualify, the RRSP funds you’re using must be on deposit for at least 90 days. You’ll also need a signed Agreement to buy or build a qualifying home – new or resale.

Even if you have already saved for your down payment, it may make good financial sense to access your savings through the Home Buyer’s Plan. For example, if you had already saved $2,000 for a down payment, and assuming you still had enough “contribution room” in your RRSP for a contribution of that amount, you could move your savings into a registered investment at least 90 days before your closing date and then take the tax deduction on your tax return. You can then use the tax refund you receive to repay back your RRSP or buy that new living set you have had your eye on.  While using your RRSP for a down payment may help you buy a home sooner, it can also mean missing out on some tax-sheltered growth. So be sure to ask your financial planner whether this strategy makes sense for you, given your personal financial situation.

What are the benefits of using a Mortgage Broker?

A registered mortgage agent is an independent real estate financing professional who specializes in finding individuals and businesses the money they need.  Mortgage professionals are independent contractors who canvass their entire network of lenders to find you the money you need.  By combining professional expertise with direct access to the loan products of multiple lenders, a mortgage agent provides consumers the most efficient and cost-effective method of offering suitable financing options tailored to the consumer’s specific financial goals.  This is why in the United States 3 of every 4 mortgages are placed through mortgage brokers. The simple reason is that the U.S. consumer knows that using a mortgage broker is the intelligent way of finding a mortgage.

What do I do next?

For a no-obligation evaluation of your financing needs, access to Submit a Deal button a and provide the requested information. It takes 30 seconds but may save you thousands.

Already have an Offer?

If you have already received a written offer from your bank or another lender, do yourself a favor and complete our Submit a Deal form. We will canvass the other lender’s we deal with to see if we can get you a better deal. The way we see it, the big banks in Canada make enough money! Let us make them compete for your business when it comes to mortgage shopping!