The Language of Mortgages

Whether you are purchasing your first home, upgrading to a larger home, downsizing or relocating, if you need a mortgage, chances are you will come across some if not all of the following terms.

Given that a mortgage is a long-term commitment, it is best you understand the terminology used when shopping for your mortgage as you will have to live by the terms of your mortgage for years to come.

Amortization - The period over which the principal and interest on installment or mortgage loans are repaid.

Appraisal - The process whereby the value of a property is determined for lending purposes (usually for security on a personal loan, mortgage or line of credit).

Closed Mortgage - Usually does not allow the borrower to pay more principal than is specified in the mortgage agreement.

Conventional Mortgage - A mortgage loan up to a maximum of 75% of the appraised value or purchase price of the property, whichever is less. Mortgages exceeding this limit must be insured by CMHC (Canada Mortgages & Housing Corporation).

CMHC - Canada Mortgages & Housing Corporation is the Federal crown Corporation that administers the National Housing Act.

Equity - The value of property beyond what may be owned on the property. Thus, a house may be worth $250,000 with an outstanding mortgage of $100,000, creating equity of $150,000.

Gross Debt Service Ratio - (GDSR) The percentage of pre-tax income needed to cover payments related to housing, including mortgages, property taxes, maintenance fees (if applicable) and other household costs.

High-Ratio Mortgage - A mortgage for more than 75% of the appraised value or purchase price of a home, whichever is less.

Maturity Date - The last day of the term of a mortgage.

Open Mortgage - A loan in which the borrower can repay all, or part, of the debt without being charged a penalty (as distinct from a Closed Mortgage).

P.I.T. - (principal, interest and taxes) The regular mortgage payment that includes payment against a portion of the principal, the interest, and the property taxes.

Pre-Approves Mortgage - One that is approved, based on the borrower's financial circumstances, prior to the purchase.

Prime - The lowest interest rate a financial institution charges its best customers.

Refinancing - Paying off an existing mortgage and arranging a new one or re-negotiating the terms and conditions of an existing mortgage.

Term - The length of time during which you pay a specific interest rate on your mortgage. You may not have paid off the entire mortgage principal at the end of the term because your amortization period will likely be longer that the term.

Total Debt Service Ratio - (TDSR The percentage of pre-tax income required to cover all payments for housing and all other debts; i.e.: credit card debt, personal loans, car loans, student loans etc.