Common Mortgage Terms and Definitions

Adjustable Rate Mortgage (ARM)

A mortgage where the interest rate and payment float with a specified benchmark rate, usually prime rate. Most floating rate mortgages in Canada are ARMs, although many lenders offer variable rates with fixed payments. See also: Variable Rate Mortgage

Prime Rate

Historically prime rate has referred to the interest rate banks charged their most credit-worthy customers or corporations. That is not always the case today. Today it is generally a reference rate upon which other rates are quoted. For example, fluctuating variable rates and lines of credit usually have rates that are based on prime +/- a specified... [Click Term Details link below for more...]

All-in-One Mortgage

All-in-one mortgages combine your mortgage and personal banking accounts. Because the interest is calculated daily, any deposits made into the account, such as a paycheque, immediately offset your debt. That reduces the debt balance that your interest is calculated on, thus saving you interest.

Alt-A Mortgages

Short for “Alternative A,” an Alt-A mortgage is considered riskier than a traditional “A” mortgage (i.e., “prime” mortgage) but less risky than a subprime mortgage. Mortgages can fall into this classification if the borrower cannot provide complete income documentation, has a lower credit score or a higher debt ratio. See also: Prime Mortgage, Subprime Mortgage

Amortization

This refers to the amount of time it takes to repay a mortgage in full. For example, a mortgage with an amortization period of 25 years will be fully paid off in its 25th year, assuming the payments are made on time and that no extra payments are made.
Spy Tip: If you have inconsistent income, unsecured higher-interest debt or a better use of your discretionary cash flow, you may want to set your amortization as long as possible. That gives you more payment flexibility. With standard mortgages, you can always increase your payments or make prepayments after closing to reduce your effective amortization later. See also: Mortgage Term

Arrears

A mortgage that currently has one or more overdue payments is said to be “in arrears.”
Canadian mortgage arrears statistics most commonly refer to borrowers who are 90 days or more past due on their payments.

Assumable Mortgage

This refers to a mortgage that can be “assumed” by a property’s new owner. The outstanding mortgage and its terms can be transferred from the original homeowner to the buyer. The new borrower must apply, qualify for the mortgage and be approved by the lender.
This arrangement can be especially advantageous for the buyer if the seller’s mortgage has a below-market interest rate.

Bank of Canada

As Canada’s central bank, the Bank of Canada’s official mandate is to “promote the economic and financial welfare of Canada.” It does this by implementing monetary policy, primarily through setting the target for the overnight rate, or the “key policy rate.” It manipulates this policy rate in order to keep the inflation rate as close to 2% as possible.

Bankers’ acceptance (BA)

A bankers’ acceptance is a debt instrument that is guaranteed by a bank and used to raise short-term funds in the money market. Lenders refer to bankers’ acceptance yields when setting variable mortgage rates. The 30-day BA is therefore one of the leading indicators of variable-rate mortgage discounts.

Term

Term refers to length of the mortgage contract. It is the amount of time (generally measured in years) that the conditions of the loan remain in effect. At the end of the term, the mortgage balance either needs to be repaid in full, renewed for another term, or refinanced.
Term and amortization are often confused, but are not the same.

Basis Points (bps)

A basis point represents one hundredth of a percent.In other words, 1.00% = 100 basis points. The difference between 3.49% and 3.29%, for example, is 20 basis points.
Basis points, often abbreviated as "bps," are a common unit of measurement when discussing small movements in interest rates and bond yields.
See also: Percentage points

Bearish

Bearish typical refers to something that pushes down prices. Bearish is the opposite of bullish.When we use the word "bearish" with respect to mortgage rates on RateSpy, it means something that could exert downward pressure on mortgage rates over some period of time in the future.
This is different from how interest rate traders use the term. When someone says bonds are looking bearish, it implies they think interest rates will rise, since bond prices and bond rates always move in opposite directions.

Bullish

Bullish typical refers to something that pushes up prices. Bullish is the opposite of bearish. When we use the word "bullish" with respect to mortgage rates on RateSpy, it means something that could exert upward pressure on mortgage rates over some period of time in the future. This is different from how interest rate traders use the term. When... [Click Term Details link below for more...]

Big Six Banks (Big 6)

The term “Big 6 Banks” is used to describe Canada’s six largest banks:

• Bank of Montreal (BMO)

• Canadian Imperial Bank of Commerce (CIBC)

• National Bank of Canada (NBC)

• Royal Bank of Canada (RBC)

• Scotiabank (Scotia)

• TD Bank (TD)

Blended Rate

A blended interest rate is a combination of an existing rate and a new rate. It is a weighted average calculation based on both rates and the amount of principal associated with each rate.
Many lenders offer blended rates when a borrower is increasing his/her mortgage before maturity. In that case, the rate on the borrower’s “old money” is blended with the lender’s current rate on the “new money” borrowed.

Principal

Principal refers to the amount of money that was borrowed, or that still remains on the loan. Mortgage payments are split into two portions. One part of the payment goes towards interest charges, and the remaining portion goes towards paying down the principal balance of the loan.

Breaking a Mortgage

Breaking a mortgage is when you terminate a mortgage early before the end of the term (maturity date). A penalty generally applies to any “closed” mortgage if it is broken before maturity.
Spy Tip: You can reduce your penalty by making a prepayment prior to requesting discharge from your lender. Some brokers can even arrange short-term loans for this purpose. Note, however, that some lenders do not count prepayments made within 30 days of discharge. Know your lender’s policy if you plan to use this strategy.

Maturity Date

The maturity date refers to the last day of a mortgage term. The mortgage must either be repaid in full, renewed or refinanced at that time.

Mortgage Discharge

When a lender releases a borrower and any guarantors from their liability under the mortgage agreement and releases the lender's claim on the borrower's collateral (property).
ou need to discharge a mortgage when you refinance it or otherwise pay it off.
Discharge fees of $75 to $500 generally apply depending on the lender and province.

Bridge Financing

Bridge financing is a short-term loan you get when you buy a new home but your old home closes after the new home.
The bridge covers your down payment on the new home until your old home sells and you can access its equity. The amount of bridge loan equals:

The purchase price of your new house
Minus
Your current home's mortgage balance
Minus
The deposit on the new home. This leaves you with the amount that must be bridged (financed) until your old home sells. Synonyms: Bridge loan

Down Payment

The money (a.k.a. equity) that you contribute when buying a property. The more money you put down, the less you have to finance.

The minimum down payments in Canada are as follows:

• To purchase an owner-occupied home: 5%
• To purchase and avoid paying mortgage default insurance: 20%
• To refinance at the lowest rates: 20-25% (depending on... [Click Term Details link below for more...]

Equity

The net value that an owner has in a property. It is the difference between the price that a home could be sold for and the amount still owing on any mortgages.

Bridge Financing

Bridge financing is a short-term loan you get when you buy a new home but your old home closes after the new home.
The bridge covers your down payment on the new home until your old home sells and you can access its equity.

The amount of bridge loan equals:
The purchase price of your new house
Minus
Your current home's mortgage balance
Minus
The... [Click Term Details link below for more...]

Bulk Insurance (Portfolio Insurance)

Bulk insurance, or portfolio insurance, is a type of mortgage default insurance that lenders buy to manage risk on their low-ratio mortgages. It’s different than normal default insurance because the lender pays the premium, not the borrower.

Mortgage Insurance

Also known as mortgage default insurance, this is a form of protection for lenders (and that lender’s investors) in the event that a borrower defaults on his or her payments. For homebuyers with a down payment of less than 20%, insurance is generally required by law. Default insurance is provided by either CMHC, Genworth or Canada Guaranty. Mortgage... [Click Term Details link below for more...]

Low-Ratio

A low-ratio mortgage, also known as a conventional mortgage, is one that does not exceed 80% the property’s appraised value. In other words, a low-ratio mortgage is one in which the borrower has at least 20% equity. By comparison, mortgages with less than a 20% down payment are called high-ratio mortgages. Unlike high-ratio mortgages, mortgage... [Click Term Details link below for more...]

Bullish

Bullish typical refers to something that pushes up prices. Bullish is the opposite of bearish. When we use the word "bullish" with respect to mortgage rates on RateSpy, it means something that could exert upward pressure on mortgage rates over some period of time in the future.
This is different from how interest rate traders use the term. When someone says bonds are looking bullish, it implies they think interest rates will fall, since bond prices and bond rates always move in opposite directions.

Closed Mortgage

A closed mortgage cannot be repaid or refinanced without penalty until the end of its term.
The amount of extra payments made towards a closed mortgage in any given year typically cannot exceed the lender’s limit, which usually ranges from 10% to 25% of the original mortgage balance per year. Otherwise, a penalty applies.
See also: Open mortgage

Co-Borrower (Co-Signor)

Not to be confused with a guarantor, a co-borrower is an additional party who applies for the mortgage and is jointly responsible for its repayment. If a husband and wife both apply for a mortgage, they are considered co-borrowers.

Guarantor

A guarantor is someone who legally agrees to take on mortgage payments in the event that the borrower defaults. Guarantors can be required if the applicant or applicants have sufficient income for the mortgage approval, but insufficient credit strength.
A guarantor is unlike a co-borrower/co-signor in that they are not on the title of the property.

Collateral Charge

Broadly speaking, there are two types of mortgages: standard charges and collateral charges.
Think of a standard charge as just a regular old mortgage. A collateral charge is different, however, because it lets you re-borrow more money—using the equity in your home—without having to refinance the mortgage. Virtually all secured lines of credit (a.k.a. HELOCs) and readvanceable mortgages are collateral charges. Avoiding refinancing saves you lawyer fees (roughly $750 or so). The tradeoff of a collateral charge is that you need to refinance to switch lenders whereas a standard charge can be transferred (“switched” to a new lender with no legal or appraisal fees). Some lenders will pay your legal fees to get you as a new customer, even with a collateral charge, but their rates are usually higher.Here are some quick rules of thumb to summarize…

Choose a standard charge (regular mortgage) when:

• You know for a fact you won’t need to borrow more during the term of your mortgage

Choose a collateral charge when:

• You think you might need to borrow more, but you don’t know when
• You want a secured line of credit with your mortgage (for emergency funds, future renovations, investing, etc.)
• You want a hybrid mortgage rate (most are collateral charges)

Other points to keep in mind:

• Many people who don’t expect to refinance end up doing so
• You generally can’t get a second mortgage if you have a collateral charge (but second mortgages are expensive anyways)
• Some lenders register their collateral charges for more than the value of the home. That way, if the home value rises, you can borrow more at that time.
• You can never borrow more than 80% of your current home value regardless
• Some lenders, like TD Canada Trust, Tangerine and many credit unions, sell all of their new mortgages as collateral charges

Contract Rate

The contract rate is the official rate that monthly payments are based on for a given mortgage. It’s the rate you agree to in your mortgage contract.
See Also: Effective Rate

Effective Rate

An effective interest rate is a rate that takes into account any cash rebates paid to the borrower.
For example, if the contract rate is 3.00% on a $200,000 five-year mortgage amortized over 25 years, and the borrower is getting $1,000 cash back, the effective rate will be lower than 3.00% because the cash lowers the effective borrowing cost. In... [Click Term Details link below for more...]

Conversion Rate

A conversion rate is the interest rate offered to clients when switching from a variable or short-term fixed rate to a longer-term fixed mortgage. Conversion rates are typically not as competitive as rates offered to the new borrowers.
Cases when a conversion rate applies include:

• Converting from a variable to a fixed rate
• Switching from a convertible term to a fixed or variable term
• Switching from a line of credit to a fixed or variable term

Credit Score (Beacon Score)

This is a number assigned to virtually anyone who has ever borrowed money and has a credit history (be it a credit card, car loan, mortgage or any other personal loan). Lenders use it to determine their ability to repay a loan. Credit scores range from 300 and 900 and are calculated based on a person’s borrowing history. Late payments, utilizing high percentages of your credit limits, and/or frequent credit applications can result in lower scores. In Canada, Equifax and TransUnion Canada are the primary companies that track credit scores. Credit reports can be requested from either of these companies free of charge, but you’ll usually have to pay to see your credit score.

Credit Utilization

Credit utilization is the percentage of available credit that you have utilized.
For example, if you have a credit card with a $10,000 limit and a line of credit with a $5,000 limit, and you have borrowed a total of $7,500 from both combined, then your overall credit utilization is 50% ($7,500 / $15,000). Ongoing high credit utilization (e.g., above 70-80%) will weigh down your credit score.

Conventional Mortgage

A conventional mortgage, also known as a low-ratio mortgage, is a mortgage loan that is no more than 80% the property’s appraised value. When you make a down payment of 20% or more, you are getting a conventional mortgage.
Mortgages with less than a 20% down payment are called high-ratio mortgages. Mortgage default insurance is not required by law for conventional mortgages, as it is with most high-ratio mortgages.

Low-Ratio Mortgage

A low-ratio mortgage, also known as conventional mortgage, is a mortgage loan of up to 80% the property’s appraised value, meaning a down payment of 20% or more is required. Mortgage default insurance is not required by law for conventional mortgages.
By comparison, mortgages with less than a 20% down payment are called high-ratio mortgages.

High-Ratio Mortgage

A high-ratio mortgage is one with a loan-to-value of 80% or more, which is to say one with a down payment of less than 20%.
Most high-ratio mortgage are required by law to have mortgage default insurance, which is provided by either CMHC, Canada Guaranty or Genworth. The borrower pays a premium for this insurance.
By comparison, mortgages with more... [Click Term Details link below for more...]

Debt Ratio

A person's monthly obligations divided by their gross monthly income.
This key calculation helps a lender understand if you can make your mortgage payments.
Lenders are most interested in a person's minimum required housing expenses, loan payments, credit cards and support payments. Things like cable TV, your cell phone, internet and insurance costs are bills that can be cancelled. Therefore, lenders exclude them from the debt ratio calculation. See also: Gross Debt Service (GDS) ratio and Total Debt Service (TDS) ratio

Deflation

Deflation is a persistent decrease in the general price level, such that overall prices are falling (negative) on a year-over-year basis. The general price level is measured by the Consumer Price Index (a.k.a. CPI). If the annual rate of increase in CPI is 3% for example, and it drops to -2%, that is deflation. Deflation can be highly destructive to an economy. Here’s a short primer on deflation from the Bank of Canada.

Direct Lender

A direct lender, or direct-to-consumer lender, is one that sells mortgages directly to consumers online, without using commissioned salespeople.

Discharge Statement

A statement provided by your existing lender that outlines the amount required to pay off a mortgage

The discharge statement is requested when you plan to pay the mortgage off in full. It lays out the terms and conditions you must meet for the lender to release the borrower and any guarantors from their liability under the mortgage agreement and release the lender’s claim on the borrower’s collateral (property). Discharge statements are also referred to as:

• “payout statements”
• “assignment statements” (in cases where you’re merely transferring to a new lender, as opposed to refinancing or paying off the mortgage permanently)

Discretionary Rate

A discretionary rate is a preferred rate that a bank or credit union is willing to offer certain well-qualified clients, but that it does not advertise publicly. A client’s ability to obtain discretionary discounts is based on a variety of factors, including their history with that institution, their negotiating ability, their credit worthiness, etc. Here’s a link to view RateSpy’s current estimate of big bank discretionary mortgage rates.

Disinflation

Disinflation is a slowing in the rate of increase in the general price level. The general price level is measured by the Consumer Price Index (a.k.a. CPI). If the annual rate of increase in CPI is 3% for example, and it drops to 1%, that is disinflation.

DoF

DoF is short for the "Department of Finance."

Dove (Dovish)

A dove takes the opposite viewpoint of a hawk. A dove is someone who has relatively low inflation expectations and favours lower interest rates in order to raise future inflation to an acceptable level. See also: Hawk (Hawkish)

Down Payment

The money (a.k.a. equity) that you contribute when buying a property. The more money you put down, the less you have to finance

The minimum down payments in Canada are as follows

• To purchase an owner-occupied home: 5%
• To purchase and avoid paying mortgage default insurance: 20%
• To refinance at the lowest rates: 20-25% (depending on lender)
• To get a home equity line of credit (HELOC): 20%
• To purchase a 1-4 unit rental property at the best interest rates: 20%
• To purchase a 5+ unit rental property: 15%
• To get an equity mortgage: 35% (at least)
• To get a mortgage as a non-resident: 35%

Effective Rate

An effective interest rate is a rate that takes into account any cash rebates paid to the borrower. For example, if the contract rate is 3.00% on a $200,000 five-year mortgage amortized over 25 years, and the borrower is getting $1,000 cash back, the effective rate will be lower than 3.00% because the cash lowers the effective borrowing cost. In this example, the effective rate would be approximately 2.88%.

Equity

The net value that an owner has in a property. It is the difference between the price that a home could be sold for and the amount still owing on any mortgages.

Fixed Rate Mortgage

As its name implies, a fixed rate mortgage is a mortgage loan with a fixed rate of interest and equal payments for the entire term of the mortgage. Fixed rate mortgages, during the term of the mortgage, are unaffected by changes to Canada’s prime rate.

Floater

Someone who floats their mortgage rate.

In other words, someone who chooses a variable or adjustable-rate mortgage, as opposed to a fixed-rate mortgage.

Foreclosure

Foreclosure is the process in which a bank or lender takes back possession of a property. This often occurs after the homeowner has defaulted on his or her mortgage loan by failing to keep up with the agreed upon payment schedule. A foreclosed home is then typically sold by the lender to recoup all or part of the mortgage loan outstanding.

Gross Debt Service (GDS) ratio

The percentage of the borrower’s income needed to cover all housing costs (specifically, mortgage payments, property taxes, heat and ½ of any condo fees). The traditional limit for an acceptable GDS ratio has long been 32%. But most lenders allow up to 39%, especially if the mortgage is insured and the borrower has a high credit score.

Guarantor

A guarantor is someone who legally agrees to take on mortgage payments in the event that the borrower defaults. Guarantors can be required if the applicant or applicants have sufficient income for the mortgage approval, but insufficient credit strength. A guarantor is unlike a co-borrower/co-signor in that they are not on the title of the property.

Hawk (Hawkish)

A hawk is someone who has relatively high inflation expectations and favours higher interest rates in order to lower future inflation to an acceptable level. See also: Dove (Dovish)

High-Ratio Mortgage

A high-ratio mortgage is one with a loan-to-value of 80% or more, which is to say one with a down payment of less than 20%. Most high-ratio mortgage are required by law to have mortgage default insurance, which is provided by either CMHC, Canada Guaranty or Genworth. The borrower pays a premium for this insurance. By comparison, mortgages with more than a 20% down payment are called conventional or low-ratio mortgages.
Synonyms:high ratio, high-ratio

Home Equity

This is the total value of a home, less any mortgage(s) owing. Home equity can be calculated by taking the market value of the property and subtracting the remaining mortgage balance. Home equity is built up over time as the property value increases and as the property’s mortgage balance decreases.

Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit (HELOC) is a revolving line of credit secured against the borrower’s home. These are the current best HELOC rates. The owner can borrow any amount up to the lender’s approved limit, and pay interest only on the amount used. By regulation, the maximum loan-to-value on the revolving portion of a HELOC is 65%. However, most lenders allow the borrower to add another 15% in the form of an amortizing mortgage, for a total loan-to-value of 80%. If a borrower makes interest-only payments on a HELOC, the amortization is effectively infinite. In other words, it would never be paid off unless principal payments were made also.

Hybrid Mortgage

A hybrid mortgage is designed to diversify a borrower's rate risk.It has

• both a fixed and variable portion (e.g. 60% fixed rate and 40% variable rate) and/or
• a long term and a short term (e.g., a 5-year fixed and a 1-year fixed).



A hybrid enables you to enjoy the stability of a fixed rate, while taking advantage of potential rate savings on the variable portion. These are Canada’s best hybrid mortgage rates.

• Hybrids are available at only a minority of lenders
• Most lenders do not offer hybrids if you have less than 20% equity
• Hybrids are usually collateral charge mortgages and therefore best suited to mortgages over $200,000+. That’s due to the additional fixed costs of changing lenders at maturity. (Moving a collateral charge mortgage to a new lender can cost you roughly $250 to $1,000, depending on whether the new lender pays any of your fees.)

Insurable

An "insurable" mortgage is one that has 20% equity or more and meets all other default insurance requirements. Unlike regular default insurance (a.k.a. "high ratio insurance" and "transactional insurance") the insurance in this case is paid for by the lender. The lender buys this insurance to lower its funding costs. That's a good thing for borrowers... [Click Term Details link below for more...]

Interest Rate Differential (IRD)

The Interest Rate Differential is a compensation charge for the early termination of a mortgage prior to its maturity date. IRDs apply to fixed rate mortgages. The IRD is based on the difference between your rate and the rate the lender can lend at today, for a term equivalent to your remaining term. The more your rate is above today’s rates, the... [Click Term Details link below for more...]

Loan-to-Value Ratio (LTV)

Loan-to-value refers to the amount of a mortgage loan in comparison to the value of the property that has been mortgaged. For example, if the property value is $500,000 and a down payment of $50,000 is made, the loan-to-value ratio is 90%. This figure determines what kind of mortgage you can get and whether that mortgage will require default insurance.

Low-Ratio

A low-ratio mortgage, also known as a conventional mortgage, is one that does not exceed 80% the property’s appraised value. In other words, a low-ratio mortgage is one in which the borrower has at least 20% equity. By comparison, mortgages with less than a 20% down payment are called high-ratio mortgages. Unlike high-ratio mortgages, mortgage... [Click Term Details link below for more...]

Low-Ratio Mortgage

A low-ratio mortgage, also known as conventional mortgage, is a mortgage loan of up to 80% the property’s appraised value, meaning a down payment of 20% or more is required. Mortgage default insurance is not required by law for conventional mortgages. By comparison, mortgages with less than a 20% down payment are called high-ratio mortgages.

Maturity Date

The maturity date refers to the last day of a mortgage term. The mortgage must either be repaid in full, renewed or refinanced at that time.

Monoline Lender

This term refers to a company whose business is strictly mortgage lending, and hence has no other product offerings that it can cross-sell to customers.

Mortgage Assignment (Switch)

A mortgage assignment refers to the transfer of mortgage ownership from one lender to another. This happens when the mortgage holder wants to “switch” his or her mortgage to a new lender.

In a mortgage assignment, the key terms of a mortgage, such as the amount, amortization period and parties to the mortgage, cannot be changed. In cases where... [Click Term Details link below for more...]

Mortgage Debt Ratios

Mortgage debt ratios measure a borrower’s ability to repay a loan. Lenders generally will not approve a borrower whose debt ratios are above that lender’s maximums.

There are two common debt ratios, the Gross Debt Service (GDS) ratio and the Total Debt Service (TDS) ratio.

Mortgage Debt Ratios

Mortgage debt ratios measure a borrower’s ability to repay a loan. Lenders generally will not approve a borrower whose debt ratios are above that lender’s maximums.

There are two common debt ratios, the Gross Debt Service (GDS) ratio and the Total Debt Service (TDS) ratio.

Mortgage Discharge

When a lender releases a borrower and any guarantors from their liability under the mortgage agreement and releases the lender's claim on the borrower's collateral (property).

You need to discharge a mortgage when you refinance it or otherwise pay it off.

Discharge fees of $75 to $500 generally apply depending on the lender and province.

Mortgage Insurance

Also known as mortgage default insurance, this is a form of protection for lenders (and that lender’s investors) in the event that a borrower defaults on his or her payments. For homebuyers with a down payment of less than 20%, insurance is generally required by law. Default insurance is provided by either CMHC, Genworth or Canada Guaranty. Mortgage... [Click Term Details link below for more...]

Mortgage Origination

"Mortgage origination" can be a noun that refers to the creation of a new mortgage (or mortgages).

"Originating a mortgage" can also be a verb that means the process by which a mortgage provider completes a mortgage transaction.

Mortgage origination entails underwriting, fulfillment and closing. The professionals that manage these processes are... [Click Term Details link below for more...]

Mortgage Prepayment

A mortgage prepayment is an extra payment made in addition to your regular mortgage payments. It is applied directly to the principal balance of the loan. Prepayments are optional and can be in the form of lump sums or ongoing payment increases.

Mortgage Refinance

Refinancing a mortgage involves replacing the existing loan with a new loan. Refinances are usually required if you wish to increase your mortgage amount or amortization length. Refinances are also generally required if you wish to move from one lender to another and have a “collateral charge” mortgage. Because refinancing entails re-registering a... [Click Term Details link below for more...]

Mortgage Renewal

A mortgage renewal is an agreement between a borrower and the lender to extend the mortgage to a new term at a new interest rate. Mortgages can renew at the maturity date, or can be early renewed.

Spy Tip: Never accept your lender’s first renewal offer, and possibly not even its second offer. Always shop the market and hold out for a better rate.... [Click Term Details link below for more...]

Mortgagor

Mortgagor is another term for a mortgage borrower.

Negative Amortization

Refers to a case where your mortgage payment is not enough to cover the interest due. The interest then builds up and your principal increases instead of shrinking. In rare cases, negative amortization can occur if you have a fixed-payment variable-rate mortgage and prime rate jumps considerably.

Negative Equity

Also referred to as being “underwater,” having negative equity means your mortgage balance is greater than the value of your house. The risk of this is higher for those who make smaller down payments, such as 5%. In that case, it only takes a small depreciation in home value for the equity to turn negative.

Notice of Assessment (NOA)

A Notice of Assessment (NOA) is a detailed tax statement sent annually by the Canada Revenue Agency. It includes information about an individual’s taxable income information for the current year, taxes owed, taxes paid, tax refund amount and RRSP contribution room. Lenders commonly request the last two years of NOAs for borrowers who are self-employed or on commission.

O.A.C.

The acronym for “on approved credit.” This is a typical disclaimer on advertised mortgage rates.

Overnight Index Swap (OIS) [OIS]

An Overnight Index Swap (OIS) is an interest rate derivative in which two parties agree to exchange (swap) a specific fixed interest rate obligation for a floating rate obligation linked to the overnight rate. This instrument is popular amongst financial institutions as a way to hedge risk, since participants can use the OIS to hedge their exposure... [Click Term Details link below for more...]

Open Mortgage

In contrast to a closed mortgage, an open mortgage can be repaid or refinanced at any point during its term without penalty. Borrowers pay for the flexibility of an open mortgage with a higher rate.

Spy Tip: At today’s rates, open mortgages generally don’t make sense if you plan to hold a mortgage for longer than 6-9 months.

OSFI

OSFI stands for "The Office of the Superintendent of Financial Institutions." It is Canada's banking regulator. Note: OSFI regulates federal banks, trusts and insurance companies. Credit unions are provincially regulated, however, and therefore not directly regulated by OSFI. Mortgage Finance Companies (e.g., First National, MCAP, etc.) get most of... [Click Term Details link below for more...]

OTBE

Short for "other things being equal."

Overnight Index Swap (OIS) [OIS]

An Overnight Index Swap (OIS) is an interest rate derivative in which two parties agree to exchange (swap) a specific fixed interest rate obligation for a floating rate obligation linked to the overnight rate. This instrument is popular amongst financial institutions as a way to hedge risk, since participants can use the OIS to hedge their exposure... [Click Term Details link below for more...]

Percentage Point (pp)

A percentage point is a unit of one percent. For example, a change from 30% to 35% is an increase of five percentage points. See also: Basis points

Portable Mortgage

A Portable Mortgage allows the borrower to transfer the mortgage balance, terms and interest rate to a new property without penalty. When a mortgage is ported it remains with the same lender. Lenders typically give borrowers anywhere from 1 day to 120 days to port their mortgage.

Spy Tip: Always check your lender’s porting policy if there’s a chance... [Click Term Details link below for more...]

Posted Rate

A lender's advertised mortgage rate, typically an undiscounted rate.Posted rates are used mainly for:

• penalty calculations
• cashback mortgage calculations
• determining rate reductions for borrowers who are already approved, in the case where rates are falling.

Posted Rate

As the term implies, a pre-approval is an initial evaluation of a homebuyer’s borrowing qualifications. This is used to determine whether someone might get approved, as well as the maximum amount they might be approved for.

Spy Tip: A pre-approved mortgage is always subject to lender conditions. If you’re putting down less than 20%, a pre-approval... [Click Term Details link below for more...]

Prime Mortgages (“A” Mortgages)

Prime mortgages, also known as “A” mortgages, are considered the highest quality and the lowest risk due to the strong credit standing of the borrower.See also: Subprime mortgage

Prime Rate

Historically prime rate has referred to the interest rate banks charged their most credit-worthy customers or corporations. That is not always the case today. Today it is generally a reference rate upon which other rates are quoted. For example, fluctuating variable rates and lines of credit usually have rates that are based on prime +/- a specified... [Click Term Details link below for more...]

Principal

Principal refers to the amount of money that was borrowed, or that still remains on the loan. Mortgage payments are split into two portions. One part of the payment goes towards interest charges, and the remaining portion goes towards paying down the principal balance of the loan.

Qualifying Rate

Also referred to as the Benchmark Qualifying Rate, it's the rate lenders use to determine how much of a mortgage payment you can afford.

On insured mortgage, you must prove you can afford a payment at the Mortgage Qualifying Rate (MQR). This rate equals the mode average of the Big 6 banks’ 5-year posted rates.

On an uninsured mortgage, you must prove... [Click Term Details link below for more...]

Quantitative Easing

Quantitative easing occurs when a central bank purchases securities (like government bonds) in the open market in order to lower interest rates and stimulate the economy.

Quick Close

A quick close mortgage is one that closes in a short period of time, typically 30-45 days.

Quick closings often come with lower rates because the lender doesn’t have to hedge its rate guarantee as long.

Readvanceable Mortgage

A readvanceable mortgage has a built-in line of credit that lets you re-borrow off the line of credit after you pay down the mortgage portion.

Readvanceable mortgages provide homeowners with a low cost source of borrowing for renovations, investing, business use and emergencies, among other things. Depending on the lender, the line of credit limit... [Click Term Details link below for more...]

Refi

Short for"refinance."

Reverse Mortgage

A reverse mortgage is a mortgage product for seniors that allows them to withdraw up to half the equity from their home in tax-free payments, typically for the purpose of supplementing retirement income. Other reasons for using a reverse mortgage include home renovations, debt repayment, investment and tax purposes. The homeowner is not required to... [Click Term Details link below for more...]

Securitization

Securitization refers to the process of bundling multiple mortgages into packages (pools) and selling those pools to investors.

Selling their mortgage assets like this allows lenders to raise new capital, which in turn can be lent out to new borrowers.

Smith Manoeuvre

The Smith Manoeuvre is a leveraged investing technique whereby you:

1. Get a HELOC that's linked to your mortgage (a.k.a. A "readvanceable mortgage" where the available HELOC credit increases as you pay down your mortgage portion.)
2. Use that freed-up HELOC room to reborrow the principal that you pay down on your mortgage
3. Buy... [Click Term Details link below for more...]

Spread

A spread is the difference between two interest rates. From a lender’s perspective, the most important “spread” is the difference between the mortgage rate they offer consumers, and their cost for those funds. Other spreads include:

• The fixed - variable rate spread
• The 5-year fixed - 5-year bond yield spread (a

rough gauge of lender margin on... [Click Term Details link below for more...]

Subprime Mortgage (“B” Mortgage)

A subprime or “B” mortgage refers to a mortgage loan made to a less creditworthy borrower. This can be someone with a low credit score, high debt ratios or insufficient proof of income. To account for the greater risk, lenders charge a premium on the interest rate and carefully scrutinize the marketability of the property since they rely heavily on... [Click Term Details link below for more...]

Target Rate

The overnight target rate is also known as the Bank of Canada’s “key interest rate” or “key policy rate.” It is a foundational interest rate that influences virtually all other rates in Canada.

The Bank of Canada has eight fixed dates throughout the year on which it determines whether to cut, hike or leave the target rate unchanged.

Teaser Rate

A teaser rate is a below-market rate for a limited introductory period, after which time the rate increases to a higher level.

A teaser rate is used by mortgage providers as a way to entice new customers.

Term

Term refers to length of the mortgage contract. It is the amount of time (generally measured in years) that the conditions of the loan remain in effect. At the end of the term, the mortgage balance either needs to be repaid in full, renewed for another term, or refinanced. Term and amortization are often confused, but are not the same.

Tied Selling

Coercive tied selling is when a lender makes you believe your mortgage will not get approved unless you agree to buy other products and services from that lender. This is illegal under Section 459.1 of Canada's Bank Act. This is not to be confused with "Preferential Pricing," which is when a lender gives you a better mortgage rate in exchange for... [Click Term Details link below for more...]

Total Debt Service (TDS) ratio

The percentage of the borrower’s income needed to cover all housing costs (mortgage payments, property taxes, heat and half of any condo fees), plus the cost of servicing other debts (car payments, credit card interest, lines of credit, loans, etc.).

Traditionally, the maximum allowable TDS ratio has been approximately 40%. Today, it can be as high... [Click Term Details link below for more...]

Transfer (Switch)

A transfer (or "switch" as it's often called) is when you move a mortgage from one lender to another.

Traditionally, the maximum allowable TDS ratio has been approximately 40%. Today, it can be as high... [Click Term Details link below for more...]

• Generally, only regular (a.k.a. "standard charge") mortgages can be transferred
• Readvanceable mortgages (a.k.a.

collateral charges) must be re-registered and therefore they typically cannot be "switched" without an extra cost... [Click Term Details link below for more...]

Transfer (Switch)

A trigger rate is the rate, that if surpassed, requires a variable-rate borrower to increase her payment. Trigger rates are linked to prime rate. They ensure that variable-rate borrowers with fixed payments always cover at least the interest due to a lender is fast rising rate environments.

Trigger rates have nothing to do with adjustable-rate... [Click Term Details link below for more...]

Type-A Cottage

A type-A cottage is a winterized cottage that's built on a permanent foundation below frost line, with year-round road access, a kitchen, an indoor bathroom, a permanent heat source and potable running water.

A type-B cottage is one that doesn't meet the above criteria. For example, it may have seasonal or boat-only access, no permanent heat source,... [Click Term Details link below for more...]

Underwriting

Underwriting is the process of assessing the risk of lending to a particular borrower.

Mortgage applications are always underwritten before a lender approves or declines an applicant. During the underwriting process, lenders typically consider the borrower's employment, provable income, credit history, ratio of debt to income, property characteristics and equity, among other things.

Underwriting

This refers to a mortgage that does not have default insurance.

Default insurance is required for any normal mortgage with less than 20% equity.

Variable Rate Mortgage (VRM)

This is a mortgage with an interest rate that is not fixed. Its rate typically changes when its benchmark (usually prime rate) changes.

A VRM is often referred to as an adjustable rate mortgage (ARM). In reality, there is a slight difference. A VRM has a fixed payment while an ARM has a payment that floats with the interest rate. See also: Fixed rate mortgage

Y/Y (YOY)

Short for “year over year,” it is used to compare data from the same period a year earlier.