Mortgage Basics
Mortgage Glossary
Plain language answers to the terms you'll see during your mortgage.
- What is a conditional approval?
- You're approved, with conditions. The lender has reviewed your application and approved it based on what you provided, but still needs to verify a few items, including your signed commitment. Think of it as a green light with a short checklist. Once every condition is met, the approval becomes unconditional and you're clear to close.
- What is a mortgage commitment?
- A formal document from the lender confirming it will lend you the money, subject to any outstanding conditions. It shows your rate, term, amortization, payment and prepayment privileges. Sign and return it before the expiry date on the document.
- What does it mean to satisfy conditions?
- Conditions are items the lender must verify before your approval is final, such as your income, your down payment or an appraisal. Your broker tells you exactly what's needed and helps you get it in on time.
- What is a term?
- How long your current mortgage contract lasts, usually one to five years. At the end of the term you renew at the rates available then.
- What is amortization?
- The total time it would take to pay off your mortgage if payments stay the same. 25 years is most common for insured mortgages, and 30 years is available to first time buyers, new builds and most mortgages with 20% down. Longer means lower payments but more interest.
- What is a fixed rate?
- A rate that stays the same for the whole term. Your payment doesn't change, which makes budgeting simple.
- What is a variable rate?
- A rate that moves with the lender's prime rate. Depending on the lender, your payment stays the same while the split between principal and interest shifts, or your payment changes.
- What is an adjustable rate?
- An adjustable rate mortgage changes your payment whenever prime moves. Rates up, payment up. Rates down, payment down.
- What is a readvanceable mortgage?
- A mortgage combined with a home equity line of credit (HELOC). As you pay the mortgage down, the available HELOC credit grows, giving you access to equity without refinancing.
- What are prepayment privileges?
- Extra payments your lender allows without a penalty, usually a yearly lump sum of 10% to 20% of the original balance and the option to raise your regular payment. Using them saves significant interest.
- What is mortgage protection insurance?
- Optional coverage offered through your lender that pays some or all of your mortgage if you die, become critically ill or can't work. It's different from personal life insurance. Read the details before deciding, and your broker can help you compare.
- What is a pre-approval?
- A lender's review of your income, credit, debts and down payment that sets your maximum price and usually holds a rate for up to 120 days. It's not a final approval.
- What is the stress test?
- The rule that you must qualify at the higher of 5.25% or your contract rate plus 2%, even though you pay your actual rate. It's set by OSFI.
- What are GDS and TDS?
- Gross Debt Service is your housing costs (mortgage, property tax, heat and half of condo fees) as a share of gross income, usually up to 39%. Total Debt Service adds all other debt payments, usually up to 44%.
- What is mortgage default insurance?
- Insurance required when you put less than 20% down. It protects the lender, costs 2.80% to 4.00% of the mortgage and is usually added to the loan. Provided by CMHC, Sagen or Canada Guaranty.
- What is loan to value (LTV)?
- Your mortgage as a percentage of the home's value. A $400,000 mortgage on a $500,000 home is 80% LTV. Most refinances are capped at 80%.
- What is a HELOC?
- A home equity line of credit: a revolving line secured by your home, usually up to 65% of its value, with interest only payments on what you use.
- What is an interest rate differential (IRD) penalty?
- A prepayment penalty common on fixed mortgages, based on the difference between your rate and the lender's current rate for the time left in your term. It can be much larger than three months' interest.
- What does porting a mortgage mean?
- Moving your existing mortgage, rate and terms to a new property when you move, which can avoid a prepayment penalty. You still need to qualify.
- What is blend and extend?
- Combining your current rate with today's rate into a new, longer term instead of breaking your mortgage, often to add funds or lock in without a full penalty.
- What is bridge financing?
- A short term loan that covers your down payment when your purchase closes before your sale. It needs a firm sale and is repaid from the sale proceeds.
- What is a switch (transfer) at renewal?
- Moving your mortgage to a new lender at maturity with the same balance and amortization. There's no penalty, and since November 2024 no stress test.
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