Glossary of Mortgage Basics

Below we go through some basic terms which will be discussed when you are getting your mortgage.

Downpayment

Your Downpayment is the amount of money you are putting towards your purchase. The minimum required downpayment in Canada is 5% of the purchase price.

Mortgage Loan Insurance

If you have less than 20% saved for a down payment, you’ll have to get mortgage loan insurance. It protects the lender against the risk of mortgage default. In Canada, there are three providers of mortgage loan insurance: CMHC, Genworth, and Canada Guaranty.

Insurance premiums on mortgage loans are calculated as a percentage of your total loan amount. They’re based on factors including the size and source of your down payment, and also the type of loan you are getting.

In general, the smaller the down payment is, the higher the insurance premiums will be. Normally the cost of the mortgage loan insurance is added to your mortgage amount, so you don’t have to cover this cost up front.

Term

The term of a mortgage is the period of time in which you will be committed to your lender. Terms can range anywhere from 6 months to 10 years. Once your term is complete, you can move your mortgage to another lender, or renegotiate a new rate and term with your existing lender.

Amortization

The amortization period is just the length of time it takes you to pay back the loan. Normally this period is 25 or 30 years. The amortization will ultimately determine the size of your monthly payment.

Fixed Rate

A fixed rate is a set interest rate that you will pay over the term of your mortgage. The rates and payments do not change.

Variable Rate

A variable, or floating rate, is pegged against the Bank of Canada’s Prime Rate. When the Bank of Canada makes a rate change to their Prime rate, your rate would change too. The lenders also have discretion as to whether they will then change their own lending rate to clients.

Open and Closed Mortgages

  • An open mortgage lets you payoff the balance of the mortgage without a prepayment penalty. These usually have higher rates than a closed mortgage.
  • A closed mortgage means that you will be responsible to pay a penalty if you payoff your mortgage prior to the end of your current term. Most closed mortgages offer a prepayment allowance, meaning you can payoff a portion of your mortgage during the term without a penalty.

Open mortgages are rarely offered by lenders and usually have much higher interest rates than closed mortgages.

Prepayment Penalty

If you payoff your mortgage prior to the term being finished, you may be responsible to pay a penalty, which is calculated differently based on the type of mortgage you have and the lender you are with.

Payment Schedule

This is how often you make your mortgage payments. You can choose between weekly, bi-weekly, semi-monthly, or monthly.

Closing Costs

There are several closing costs to consider when purchasing your home. These include: Property transfer tax (in most provinces), legal fees, home inspection, appraisal, and moving costs.

If you are purchasing your first home, you may qualify for an exemption from the property transfer tax. Talk to a mortgage professional to see if this applies to you.

If you are putting less than 20% down, your mortgage lender will require you to prove that you have 1.5% of the purchase price in extra savings, over and above your downpayment, to cover your closing costs.

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