Buying a home is a big investment. With so much at stake, itâ€™s important learn what you can about the home buying process as well as understanding the “languageâ€ of mortgage lending.
So, to help you better understand what youâ€™re getting into, here is a short list of common mortgage terms to increase your knowledge.Â
- Amortization Period:Â The number of years over which you have to repay a loan. The most common period is 25 years for a first-time homebuyer.
- Benchmark Rate:Â A qualifying rate set by the Bank of Canada and can be adjusted at any time.Â All insured and insurable mortgages must meet the standard affordability tests (Gross Debt Service and Total Debt Service) “as ifâ€ the interest rate is the Benchmark Rate. Also referred to as a “stress testâ€.Â Designed to ensure that borrowers and the housing market can sustain higher interest rates.
- Bridge Financing:Â (Also referred to as Interim Financing) A loan against a property being sold allowing the owner to use their equity to purchase a new property and take possession of the new property before the Closing Date of the sale.Â There must be a firm sale of the property being sold.
- Closed Mortgage:Â A mortgage whose term cannot be altered until maturity, unless the lender agrees and the borrower agrees to pay a fee called a pre-payment penalty.
- Deposit:Â Money placed under the care of a third party (real estate representative, lawyer or notary) by the purchaser when he makes an Offer to Purchase. The money is paid to the vendor upon closing the sale or returned if the conditions are not satisfied. This is typically held in trust.
- Downpayment:Â The part of the home purchase money that is not paid out of the mortgage loan.
- Equity:Â The total value of the ownerâ€™s interest in a property, calculated as the value of the home less the total outstanding obligations.
- Fixed Rate Mortgage:Â A mortgage for which the rate of interest is fixed for a specific period of time (See term).
- Gross Debt Service Ratio (GDS):Â The percentage of the borrowerâ€™s gross monthly income that is used for monthly housing payments (principal, interest, taxes, heating costs, and half of any condominium fees).
- Loan-to-Value:Â The amount of the mortgage loan compared to the value of the property.
- Monoline Lender:Â Monoline lenders focus on just mortgages as opposed to banks and credit unions which offer a variety of services.
- Mortgage Default Insurance:Â If you have a high-ratio mortgage (more than 80% of the lending value of the property) your lender will require that you purchase mortgage loan insurance, which is available from CMHC, Genworth Canada or Canada Guaranty.
- Mortgage Life Insurance:Â Provides coverage for your family should you die before your mortgage is paid off. This insurance can be purchased through your mortgage professional.
- Portable Mortgage:Â A mortgage with an option that allows a buyer to transfer a current mortgage to a new property. (Subject to full borrower and property approval)
- Qualifying Rates: The rate used to qualify a borrower for a mortgage. Lenders use these rates to calculate your debt-service ratio, which is the ratio between your debt and income. This serves as a gauge of your ultimate ability to repay the obligation over the life of the mortgage.
- Term:Â The length of time that mortgage conditions, including the interest rate you pay, are in effect. At the end of the term, the borrower (you) can pay off the mortgage or renew for another term. Mortgage terms can range from six months to ten years; the most common is 5 years.
If you have any questions about a term you saw or any other mortgage related inquires, give me a call at (204) 720-2731. I’d love to hear from you.
Dan Landry, Mortgage Broker
Cell: (204) 720-2731