mortgage terms

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Closed Mortgage

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


BENEFITS:

  • Provides lower rates than open or convertible mortgages.
  • Allows you to make an annual prepayment of up to 10-15% of your original mortgage amount.

Open Mortgage

This type of mortgage may be repaid, in part or in full, at any time during the term without any prepayment costs. An open mortgage is generally categorized as a Home Equity Line of Credit (HELOC), in recent years the mortgages rules surrounding this type of mortgage have changed. You can finance a property up to 65% Loan to Value on a HELOC, a top up mortgage can be added as a fixed portion. Another important note on this type of mortgage is only a hand-full of lenders provide this product. 


BENEFITS:

  • Provides flexibility until you are ready to lock into a closed term.
  • Allows you to pay off any or all of the mortgage without prepayment costs.

rate type

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Fixed Rate Mortgage

An interest rate that does not change during the entire mortgage term. 


BENEFITS:

  • You can take advantage of the same interest rate for the entire term with a regular payment that stays the same.
  • You will have the security of knowing exactly how much your payments are and how much of your mortgage will be paid off at the end of your term.

Variable Rate Mortgage

An interest rate that can fluctuate during the term. The interest rate varies with changes in market interest rates (typically the bank’s prime lending rate). The mortgage payments can be fixed, or they could change if the interest rate changes – it depends on the lender and type of product. 


BENEFITS:

  • Historically, variable rates have been lower than fixed rates and could save you more money.
  • If rates go down, a larger portion of your payment goes towards principal, helping you pay off your mortgage faster.Your regular payment stays the same even if rates hange.

mortgage penalties

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Three months interest penalty

To determine the three month interest penalty your current outstanding mortgage balance is multiplied by your current face interest rate (unless otherwise specified) and divided by 4. This is the equivalent of the interest cost for your mortgage over a three month period without factoring in any principal repayment.


For example: If your mortgage had a balance of $250,000 at 6% and we wanted to find out the three month interest penalty then we would simply multiply $250,000 x 6% = $15,000 and then divide this by four to arrive at $3,750.

Interest Rate Differential Penalty

In this case the bank is trying to recover the lost interest revenue as a result of you paying out your mortgage. This usually means the difference between the interest rate on your mortgage contract compared to the rate at which the lending institution can re-lend the money today based on a comparable term. By comparable term the bank is referring to the rate on the product which most closely matches your period of time outstanding on the initial mortgage agreement.


As an example, if you were two years into a five year fixed rate mortgage then they would compare your face rate of interest with the rate of interest they would get today on a three year fixed rate mortgage because there are three years remaining in your existing contract with the bank. The goal is for the bank to subtract the rate of the comparable term from the rate of your current mortgage and then calculate the lost interest to them when the contract is broken.


As above, at a balance of $250,000 at 6% and you have 2 years in your current mortgage agreement left then they would compare this to the current 2 year mortgage rate. If this rate was 4% then the lending institution can charge you – $250,000 X 2 years X 2% (6% – 4%) or $10,000. In this example the bank would use the interest rate differential cost as this amount exceeds the cost of a three month interest penalty. While this amount is significant there are a few ways you can work to avoid or minimize it to some extent.


Before you decide to break your mortgage, it is crucial that you obtain a payout statement from your lender.  Don’t rely on the above two calculations to make a quick estimate of your penalties. This can be disastrous especially if your lender uses different calculations to estimate penalties.  I can assist you in obtaining a payout statement. Don’t hesitate to ask me!

Mortgage default insurance

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What is Mortgage Default Insurance

Mortgage Default Insurance, commonly referred to as Mortgage Insurance, allows homebuyers to achieve the dream of homeownership with a low down payment.


Mortgage insurance is required on high-ratio mortgages – that is, mortgages with a down payment of 20 per cent or less. This insurance, which protects the lender in case of borrower default, gives lenders the flexibility to offer borrowers with low down payments the same low interest rates they would offer to homebuyers with more equity.

Mortgage Premiums

Mortgage insurance premiums are based on the amount of the mortgage and although they can be paid in a lump sum upon closing, they are normally added to the mortgage amount and paid over the length of the mortgage.


This insurance is not to be confused with mortgage life insurance which protects homeowners and their families in the event of death or illness.

3 Default Mortgage Insurance Providers

In Canada, we have 3 mortgage default insurance providers:


  • CMHC
  • Genworth 
  • Canada Guaranty

stress test

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The stress Test is designed  to ensure that borrowers can afford their mortgage payments even if interest rates increases.


If you are purchasing, switching to another lender or refinancing a mortgage you have to undergo a stress test irregardless of the amount of down payment. 

Benchmark rate qualification

We have to use a a minimum qualifying rate equal to the greater of the Bank of Canada’s five-year benchmark rate (currently 5.34 per cent) or their contractual rate, plus two percentage points.

High ratio vs conventional

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High Ratio Mortgage

A high ratio mortgage is a mortgage in which a borrower places a down payment of less than 20% of the purchase price on a home.


Another way of phrasing a high ratio mortgage is one with a loan to value ratio of more than 80%.

A high ratio mortgage will require mortgage default insurance through either:


  • CMHC
  • Genworth
  • Canada Guaranty  

Conventional Mortgage

A conventional mortgage is a loan for no more than 80% of the purchase price (or appraised value) of the property.  The remaining amount required for a purchase (20%) comes from your resources and is referred to as the down payment.


In addition, conventional mortgages do not often require mortgage default insurance.  

Mortgage "local language"

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Amortization Period

The amortization period refers to the number of years it will take to pay off your mortgage through regular payments. Most mortgages are amortized over 25 years.

Mortgage Term

Not to be confused with amortization, mortgage term refers to the time period covered by your mortgage agreement. It can range from one to five years or more. After each term expires, the balance of the mortgage principal (the remaining loan amount) can be repaid in full, or a new mortgage can be renegotiated at current interest rates.

Principal

The amount initially borrowed for your home purchase. The balance of this amount will go down as you make regular mortgage payments. (Your mortgage payments go toward a portion of the principal, as well as the loan interest and, for those with high-ratio mortgages, mortgage insurance.)

Total Debt Service Ratio (TDS)

TDS refers to the percentage of your household’s gross monthly income that goes toward housing costs (i.e., mortgage, property taxes, heating, etc.) plus your other debts and financing (i.e., car loans, credit cards, etc.). Banks use this calculation, along with your gross debt service ratio, when assessing your mortgage application. The industry standard for a TDS ratio is 42 per cent.


To calculate your TDS ratio, add all of your monthly debts and divide that figure by your gross monthly income. Then multiply that sum by 100 and you’ll have your TDS ratio

Gross Debt Service (GDS)

A GDS ratio is the percentage of your income needed to pay all of your monthly housing costs, including principal, interest, taxes, and heat (PITH). You’ll also need to include 50 per cent of your condo fees, if applicable. The majority of lenders abide by a general standard of 35 per cent, so your GDS should be lower than that to qualify for a mortgage.

To calculate your GDS ratio, you’ll need to add all of your monthly housing-related costs and divide it by your gross monthly income. Then multiply that sum by 100 and you’ll have your GDS ratio.

Loan to Value (LTV)

A loan to value (LTV) ratio describes the size of a loan you take out compared to the value of the property securing the loan. Lenders use LTV's to determine how risky a loan is. A higher LTV ratio suggests more risk because the assets behind the loan are less likely to pay off the loan as the LTV ratio increases. 


To calculate an LTV ratio, divide the amount of a loan into the total value of the asset securing the loan.