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Buying a home is one of the most important financial decisions you will make. It’s common for a first-time homebuyer, or even someone who is experienced in the process, to feel overwhelmed when it comes to industry jargon.

To help you understand the process and have confidence in your choices, I have put together some of the more common mortgage terminologies you will encounter during the homebuying process! While I don’t expect you to read all of these now, I hope that this will be a helpful resource for you throughout your homeownership journey.

General Mortgage Terms

Amortization: The number of years that you take to fully pay off your mortgage (not the same as your mortgage term). Amortization periods are often 15, 20, or 25 years long.

Assuming a Mortgage: Taking over the obligations of the previous owner’s (or builder’s) mortgage when you buy a property.

Buy Down Rate: The portion of the interest rate on a buyer’s mortgage that you assume when they buy your home. If you’re selling your home and the prospective buyer doesn’t like the interest rate on their mortgage, you can offer to add a certain percentage of it onto your existing mortgage. You can add a maximum of 3%.

Closing Date: The date on which the sale of a property becomes final and the buyer takes possession of the property.

Down Payment: The money that you pay up front for a house. Typically range from 5%-20% of the total value of the home.

Home Insurance: Insurance to cover both your home and its contents (also referred to as property insurance). This is different from mortgage life insurance, which pays the outstanding balance of your mortgage in full if you die.

Inspection: The process of having a qualified home inspector identify potential repairs to the property you are interested in and their estimated cost.

Lump Sum Payment: An extra payment that you make to reduce the amount of your mortgage principal.

Mortgage: A loan that you take out in order to buy property. The collateral is the property itself.

Mortgage Life Insurance: This form of insurance pays the outstanding balance of your mortgage in full if you die. This is different from home or property insurance, which insures your home and its contents.

Pre-Approved Mortgage Certificate: A written agreement that you will get a mortgage for a set amount of money at a set interest rate. Getting a pre-approved mortgage allows you to shop for a home without worrying about how you’ll pay for it.

Offer to Purchase: A legally binding agreement between you and the person who owns the house you want to buy. It includes the price you are offering, what you expect to be included with the house, and the financial conditions of sale (your financing arrangements, the closing date, etc.).

Porting: Transferring an existing mortgage from one home to a new home when you move. This is known as a “portable” mortgage.

Pre-Payment: Repaying part of your mortgage ahead of schedule. Depending on your mortgage agreement, there may be a prepayment cost for pre-paying.

Refinancing: The process of paying out the existing mortgage for purposes of establishing a new mortgage on the same property under new terms and conditions. This is usually done when a client requires additional funds. The client may be subject to a pre-payment cost.

Renewal: Once the original term of your mortgage expires, you have the option of renewing it with the original lender or paying off all of the balance outstanding.

Term: The length of time during which you pay a specific rate on the mortgage loan (i.e., the number of years in your mortgage contract). This is different than amortization; mortgages are amortized over 20-25 years, with a shorter term (typically 6 months to 5 years). After the term expires, the interest rate is usually renegotiated with the lender.

Mortgage Types

Closed Mortgage: This type of mortgage must usually remain unchanged for whatever term you agree to. Prepayment costs will apply if you payout, renegotiate, or refinance before the end of the term.

Convertible Mortgage: These offer the same security as a closed mortgage, but allows you to convert that to a longer, closed mortgage at any time – without prepayment costs. Typically associated with fixed rate mortgages.

High-Ratio Mortgage: This is the mortgage obtained when you have less than 20% of the total purchase price to put down as your downpayment. These mortgages must be insured, typically through CMHC, Genworth Financial or Canada Guaranty.

Open Mortgage: This type of mortgage may be repaid, in part or in full, at any time during the term without any prepayment costs.

Rate Types

Fixed Rate Mortgage: An interest rate that does not change during the entire mortgage term.

Variable Rate Mortgage: An interest rate that will fluctuate in accordance with the prevailing market prime rate during the mortgage term.

Mortgage Rate: The percentage interest that you pay on top of the loan principal. For example, you may take out a mortgage of $100,000 at a rate of 12%. Your monthly payments will consist of a portion of the original $100,000, plus 12% interest.

Closing Costs

These are costs that are in addition to the purchase price of a property and which are payable on the closing date, such as the following:

Appraisal: The process of determining the lending value of a property. There is usually a fee to have an appraisal done.

Interest Adjustment: The amount of interest due between the date your mortgage starts and the date the first mortgage payment is calculated from. Sometimes there is a gap between the closing date of your home purchase and the first payment date of your mortgage, so an extra payment may be required to cover this. The payment is generally due on your closing date. You can avoid all this by arranging to make your first mortgage payment in exactly one payment period (e.g., one month) after your closing date.

Land Transfer Tax: Tax that is levied (in some provinces) on any property that changes hands.

Legal Fees and Disbursements: Some of the legal costs associated with the sale or purchase of a property. It’s in your best interest to engage the services of a real estate lawyer (or a notary in Quebec).

Prepaid Property Tax and Utility Adjustments: The amount you will owe if the person selling you the home has prepaid any property taxes or utility bills. The amount to reimburse them will be calculated based on the closing date.

Property Survey: A legal description of your property and its location and dimensions. An up-to-date survey is usually required by your mortgage lender. If not available from the vendor, your lawyer can obtain the property survey for a fee.

Sales Taxes: Taxes applied to the purchase cost of a property. Some properties are sales tax exempt (GST and/or PST), and some are not. For instance, residential resale properties are usually GST exempt, while new properties require GST. Always ask before signing an offer.

If you are looking to purchase a new home (or your first one!), please don’t hesitate to reach out to me directly to set up a phone call to discuss your needs. I would be happy to help you find the best mortgage to suit your needs!

Refinancing your mortgage refers to the process of renegotiating your current mortgage agreement for a variety of reasons. Essentially, refinancing allows you to pay off your existing mortgage and replace it with a new one.

There are a variety of reasons to consider mortgage refinancing, such as wanting to leverage large increases in property value, taking out equity for upgrades or renovations, expanding your investment portfolio, consolidating debt, getting a better rate, paying for post-secondary education, managing a divorce or changing your mortgage from fixed to a variable (or vice-versa).

Refinancing allows you to access up to 80% of your home’s equity. This can help with reducing financial stress and getting you back on track for your financial future, while still allowing you to manage your current needs. Beyond helping you get a better financial footing, refinancing has additional benefits including:

1. Access a Better Rate: One reason to refinance your mortgage is to get a better rate – this is especially true when done through a mortgage professional such as myself. On average, I have access to over 90 lenders! This allows me to find the best mortgage product for your unique needs.
2. Consolidate Debt: There are many different types of debt from credit cards and lines of credit to school loans and mortgages. But, did you know that these types of debt have much higher interest rates than those you would pay on a mortgage? Refinancing can free up cash to help you pay out these debts! While it may increase your mortgage, your overall payments could be far lower and would be a single payment versus multiple sources. Keep in mind, you need at least 20 percent equity in your home to qualify.
3. Modify Your Mortgage: Life is that it is ever-changing and sometimes you need to pay off your mortgage faster or change your mortgage type. Refinancing can help with this too!
4. Utilize Your Home Equity: If you need funds, you can refinance your mortgage to access up to 80% of your home’s appraised value!

As with everything, refinancing comes at a price! If you think that refinancing your mortgage could be the right solution, it is important to talk to us before making any changes to ensure you are not hit with surprise penalties. Talking to a mortgage broker about refinancing also ensures expert advice, plus access to even greater rates and mortgage plans to best suit your refinancing goals.

Selling your current home and moving into a new one can be stressful enough, let alone worrying about your current mortgage and whether you’re able to carry it over to your new home.

Porting enables you to move to another property without having to lose your existing interest rate, mortgage balance and term. And, better yet, the ability to port also saves you money by avoiding early discharge penalties.

It’s important to note, however, that not all mortgages are portable. When it comes to fixed-rate mortgage products, you usually have a portability option. Lenders often use a “blended” system where your current mortgage rate stays the same on the mortgage amount ported over to the new property and the new balance is calculated using the current interest rate.

With variable-rate mortgages, on the other hand, porting is usually not available. As such, upon breaking your existing mortgage, a three-month interest penalty will be charged. This charge – which can be a surprising $1,500-$4,000 penalty at closing – may or may not be reimbursed with your new mortgage.

Porting Conditions

While porting typically ensures no penalty will be charged when you sell your existing property and buy a new one, some conditions that may apply include:

• Some lenders allow you to port your mortgage, but your sale and purchase have to happen on the same day. Other lenders offer a week to do this, some a month, and others up to three months.

• Some lenders don’t allow a changed term or force you into a longer term as part of agreeing to port you mortgage.

• Some lenders will, in fact, reimburse your entire penalty whether you are a fixed or variable borrower if you simply get a new mortgage with the same lender – replacing the one being discharged. Additionally, some lenders will even allow you to move into a brand new term of your choice and start fresh.

• There are instances where it’s better to pay a penalty at the time of selling and get into a new term at a brand new rate that could save back your penalty over the course of the new term.

While this may sound like a complicated subject, your mortgage professional will be able to explain all of your options and help you select the right mortgage based on your own specific needs.

Coming up with a down payment to buy a home purchase can be difficult. But a down payment is an integral part of securing a mortgage. Today Canadians have to come up with at least 5% down when applying for a mortgage. If saving up for this kind of money proves to be a challenge for some homebuyers, in some cases borrowing the finances could be an option. Borrowing a down payment for a mortgage in Canada appears to be a growing trend in the country. What type of options exist for those who are unable to save up enough for a down payment in order to secure a home loan? Here are a few down payment borrowing sources for Canadians to consider looking into.

Line of Credit

A line of credit is a loan product that doesn’t work like a typical loan. Instead, it works somewhat like a credit card in which you withdraw funds on credit – up to your assigned limit – and pay interest only on the portion used. Once that money is paid back, you can borrow that money, again and again, paying only interest on the amount withdrawn. Can you use a line of credit for a down payment? Yes, but it cannot be from the same financial institution that the mortgage is being obtained from. Homebuyers may borrow against their line of credit in order to get the money needed to come up with a decent-sized down payment for their mortgage. However, this option should be used with caution in order to reduce any risk associated with overleveraging.

Personal Loan

A personal loan may be an option as a source of down payment funds, but usually only if your credit score and financial history are healthy. That’s because a lender will want to ensure that you are financially capable of handling additional debt, especially if you’re planning to take out a mortgage for a home purchase. Unsecured debt – which is what a personal loan is – can be risky for lenders when loaning out money to consumers who are not in good financial standing. If there is no collateral for the lender to collect if you ever default on your loan, they could be left with a bad deal. That’s why lenders will insist on borrowers having stellar credit, a high income, and a reasonable debt load before they approve a personal loan on top of a mortgage.   If you are considering taking out a personal loan to borrow for a down payment, something to keep in mind is that this will add to your debt and affect your debt-to-income ratio.

RRSP’s

The federal government offers down payment assistance in the form of the Home Buyers’ Plan. This program allows Canadians to borrow as much as $25,000 from their RRSPs ($50,000 for a couple) to be put towards a down payment on the purchase of a home. The great thing about this plan is that you have 15 years to repay your RRSP funds before being taxed on it. If you pay back all the money borrowed before this 15-year period is up, the funds are non-taxable.

There are eligibility requirements for the Home Buyers’ Plan. You must:

• Be a first-time homebuyer
• Sign a purchase agreement on a qualifying home
• Be a Canadian resident
• Designate the property as your principal home no longer than one year after buying it

In addition, the RRSP funds being used must be on deposit for a minimum of 90 days before borrowing.

Ideally, you should take the time to save up for a down payment on a home without having to borrow funds. That said, it can be a real struggle to come up with the amount of money needed for a decent down payment amount. When all else fails, there are ways to borrow the funds needed to come up with a down payment for a home purchase. Just be sure to speak with a financial advisor or mortgage specialist before choosing which route to take to make your dreams of buying a home a reality.

If you do not qualify for traditional financing all is not lost, since you may be eligible for an alternative – or private – funding.

Mortgage professionals often have access to private investors who are willing to lend money to BFS individuals looking to obtain mortgages. Although you will pay a higher interest rate – on average about 12% – this route may enable you to acquire funds to purchase a home.

It’s also important to note that there are added fees involved with private funding because the deals involve a higher degree of risk. The combined lender/brokerage fee will depend on the specific deal and the risk it poses, but the figure will be disclosed upfront so you know exactly what you’ll be expected to pay for these services.

Another key point to consider is that private financing is equity-based, meaning that the lender’s decision will be based on a specific piece of real estate. Private lenders want to know that the property is marketable and that they will be able to easily sell it should the mortgage go into foreclosure.

What exactly is alternative financing? Alternative finance refers to forms of finance that are outside the institutional finance system of banks and capital markets. ‘Fintech’ is the ecosystem within alternative finance made up of companies, technology, and processes that aim to improve traditional methods of finance in categories such as:

• Payments and invoicing
  
• Consumer lending and credit
  
• Small business lending and credit
  
• International money transfers
  
• Equity financing and crowdfunding
  
• Insurance
  
• Consumer banking
  
• Wealth management
  
• Savings and investments
  
• Capital markets
  
• Risk management
  
• Regulation management
  
• Cryptocurrency and blockchain

The decision to choose a fixed or variable rate is not always an easy one. It should depend on your tolerance for risk as well as your ability to withstand increases in mortgage payments. You can sometimes expect a financial reward for going with the variable rate, although the precise magnitude will ebb and flow depending on the economic environment.

Fixed-rate mortgages often appeal to clients who want stability in their payments, manage a tight monthly budget, or are generally more conservative. For example, young couples with large mortgages relative to their income might be better off opting for the peace of mind that a fixed-rate brings.

A variable rate mortgage often allows the borrower to take advantage of lower rates — the interest rate is calculated on an ongoing basis at a lenders’ prime rate minus a set percentage. For example, if the prime mortgage rate is 5.5 percent, the holder of a prime minus 0.5 percent mortgage would pay a 5.00 percent variable interest rate.

As a consumer, the best option is to have a candid discussion with your mortgage professional to ensure you have a full understanding of the risks and rewards of each type of mortgage.