Here are some commonly used—but not always understood—words to describe mortgages:

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Amortization Period

This is the number of years it will take to repay the entire mortgage in full and is determined when you are approved. A longer amortization period will result in lower payments but more interest overall as it will take longer to pay off. The typical amortization range is 15 to 30 years. Learn more here.

Closed Mortgage

This is any mortgage where you have agreed to pay the lender for a specified period of time. This means that you cannot pay it off, refinance or renegotiate before the mortgage term ends without incurring a penalty. Depending on the lender, there may be options for accelerated payments but it depends on your particular mortgage contract. While these mortgages tend to be a lot stricter, they can often provide lower interest rates.

Conventional Mortgage

In the case of a conventional mortgage, the loan covers no more than 80% of the purchase price on the property. This means, the buyer has put 20% (or more) down on the property. These mortgages do not require default insurance due to the amount down and are classified as Uninsurable (explained in greater detail below). Learn more here.

Debt Service Ratios

  • GROSS DEBT SERVICE (GDS) RATIO: The percentage of a person or household’s gross monthly income that goes to pay the mortgage principal and interest, property taxes and heating costs, plus 50% of any condominium maintenance fees or 100% of the annual site lease for leasehold tenure if applicable. To qualify for a mortgage, the borrower’s GDS ratio must be at or below 35 or 39% (depending on the lender).
  • TOTAL DEBT SERVICE (TDS) RATIO: The percentage of a person or household’s gross monthly income that goes to pay the mortgage principal and interest, property taxes and heating costs, plus all other debt obligations such as car payments, personal loans or credit card debt. To qualify for a mortgage, the borrower’s TDS ratio must be at or below 42% or 44% (depending on the lender).

Default

Failure to pay your mortgage on time will result in defaulting on the loan.

Derogs

Short for ‘derogatory’, derogs refers to an overdue account or late payments on your credit report.

Down

Short for downpayment. In Canada, the minimum downpayment is 5% on any home purchase.

Fixed

A fixed-rate mortgage means you are locked in at the interest rate agreed for a longer length of time. Learn more here.

Flex Down

This refers to a borrowed downpayment program, which allows homeowners to “borrow” money for the downpayment from a credit card, line of credit or other loan. In this case, the repayment of the loan is included in the debt calculations.

Foreclosure

This refers to the possession of a mortgaged property by the bank or lender if a borrower fails to keep up their mortgage payments.

High-Ratio Mortgage (Also known as an Insured Mortgage)

A high-ratio mortgage is where the buyer has provided a downpayment of less than 20% of the purchase price and needs to pay a premium known as Mortgage Default Insurance to one of the 3 mortgage insurers to insure the mortgage against default. This mortgage is also known as an Insured mortgage (explained in greater detail below). Learn more here.

Insured (High-ratio – Less than 20% downpayment)

If you put less than 20% downpayment, you will need mortgage loan default insurance. This insurance protects your lender in the event you, the borrower, default on your mortgage loan. As the perceived risk is lower for Insured loans, you the borrower are generally able to obtain the lowest rates in the market place.

The current mortgage loan insurance companies are CMHC, Sagen and Canada Guarantee.

  • Maximum 25-year amortization
  • Purchase price under $1M
  • Applies to Purchases & Eligible Switches
  • Must be Owner-occupied (but can have a rental unit)

Insurable (Greater than 20% downpayment while meeting the following criteria)

This mortgage meets all the qualifications of an insured mortgage, however, the LTV (Loan to Value) is equal to or less than 80.00%.

  • Maximum 25-year amortization
  • Purchase price under $1M
  • Applies to Purchases & Eligible Switches
  • Must be Owner-occupied (but can have a rental unit)

* In some circumstances when dealing with Insured applications, the downpayment required may be greater than 20%. These would pertain to specific niche programs only. Learn more here.

LTV – LOAN TO VALUE

This is the difference between the value of the property and the amount of mortgage registered against it; Property value $100,000 vs. Mortgage Loan Amount of $80,000 equates to an 80% LTV

MIC

Short for a Mortgage Investment Corporation, this is a group of investors who will lend you the money for a mortgage if a traditional lender will not due to unusual circumstances. Learn more here.

Open Mortgage

An open mortgage means you can pay out the balance at any time, without incurring a penalty.

PIT

Principal, interest and taxes— a calculation representing the amount you can afford to pay monthly on your home. Heating costs are often included in this calculation (PITH).

Pull

Also known as a ‘credit check’ or ‘credit inquiry’ a ‘credit pull’ refers to the act of checking a credit report to determine if the borrower is a viable investment prior to approval of the mortgage. 

Term

Term is the length of time that a mortgage agreement exists between you and the lender. Rates and payments vary with the length of the term. The most common term is a 5-year, but they can be anywhere from 1 to 10 years. Generally a longer term will come at a higher rate due to the added security. Learn more here.

Trade Lines

This refers to any credit cards, loans, wireless phone accounts, or mortgages that appear on your credit report.

Underwriting

This refers to the process of determining any risks relating to a particular loan and establishing suitable terms and conditions for that loan.

Uninsurable (Conventional – downpayment of 20% or more)

If your downpayment is 20% or greater, mortgage insurance is not required, and you, the borrower have access to more flexible terms. In some circumstances where location or condition of the property is a concern, the lender may request mortgage loan insurance as a condition of financing regardless of the LTV. In these cases, you would have to follow the insurers rules. Uninsurable files follow the rules below and are subject to a potentially higher interest rate.

  • Maximum 30-year amortization
  • Purchase price over $1M (subject to sliding scale, lender specific)
  • Purchase/Refinance/Switch
  • Possibility of exceptions on qualifying ratios
  • Owner-occupied/Cottages/Second Homes/Rentals

Learn more here.

Variable

A variable-rate refers to an interest rate that is adjusted periodically to reflect market conditions. Learn more here.

20/20

A condition that refers to repaying 20% of the mortgage balance OR increasing your payment by 20%, without incurring a penalty.

 

If you are looking into getting a mortgage don’t be afraid to ask questions! At the end of the day, the mortgage contract has your signature on it and it is important to understand any contract you are signing. Get in touch and I would be happy to discuss your situation and answer any questions surrounding mortgage conditions or jargon to ensure the best results for YOU!

 


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