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Mortgage Terms
Get confident with the language so you can make the right decisions.
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The Basics
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Glossary
Whether you’re buying your first home or renewing your mortgage loan, the world of mortgages has a number of definitions you may not be familiar with. Here we’ll help you understand the language so you’re able to make the right decisions.
What is a mortgage?
A mortgage is a loan secured by real estate/property that you pay off over time. You’ll be paying back the money you borrowed plus interest and eventually you'll be mortgage-free.
Down payment
A down payment is the amount of money you put towards the price of a home. Whatever you don’t put down is the amount you are borrowing.
If you’re putting down 20% or more, that’s a conventional mortgage.
If you’re putting down less than 20%, that’s a high ratio mortgage.
Amortization period vs term
The amortization period is the total number of years it takes to pay off your mortgage loan completely. You choose the number of years when you apply for a mortgage loan. Most first-time buyers typically pick the longest amortization period available. If your down payment is less than 20%, your maximum amortization period is 25 years. If your down payment is greater than 20%, you could have an amortization period of up to 30 years.
How does it work? The longer the amortization period, the lower your principal and interest payments will be, but overall, the amount of interest you’ll pay will be higher. With a shorter amortization period, you’ll make higher principal and interest payments, but you will pay less interest in the end.
A mortgage term is the length of time you’re committed to a mortgage rate, lender, and associated conditions.
TD has mortgage terms that range from 6 months to 10 years, with 5 years being the most common option. Once your term is up, you may be able to renew your mortgage loan with a new term and rate or pay off the remaining principal.
See how the amortization period affects a $300,000 mortgage loan based on a fixed rate of 3% over the amortization period.
|
Interest rate |
Monthly principal and |
Total interest paid |
|
|---|---|---|---|
|
15 year amortization period |
3.00% |
$2,069.07 |
$72,431.51 |
|
25 year amortization period |
3.00% |
$1,419.74 |
$125,920.37 |
Payment frequencies
Enjoy the flexibility of choosing how often to pay. You get to determine your payment schedule, from Weekly, Rapid Weekly, Bi-Weekly, Rapid Bi-Weekly, Semi-Monthly, Rapid Semi-Monthly, or Monthly.
You could link up your principal and interest payments for your mortgage loan with your pay, or opt to pay monthly or twice a month. Paying every other week might seem the same as paying twice a month, but you’ll actually be making two extra principal and interest payments a year with a biweekly payment schedule.
Mortgage types
Fixed vs variable interest rate
A fixed interest rate means your interest rate will not change throughout the term of your mortgage loan, and neither will the amount of your principal and interest payments. If you're a first-time home buyer and are happiest knowing exactly what to budget for, a fixed rate mortgage is a wise choice.
With a variable rate mortgage , the interest rate can fluctuate along with any changes in our TD Mortgage Prime Rate. Your principal and interest payments will stay the same for the term, but if the TD Mortgage Prime Rate goes down, more of your payment will go towards the principal. If the TD Mortgage Prime Rate goes up, more will go towards interest1.
If you are concerned with interest rates rising, fixed rate mortgages are more popular as you are protected from your rate going up over the term of the mortgage. Variable rate mortgages are more popular when interest rates are falling. If you do choose a variable rate mortgage and rates begin to rise, there is always the option to shift to a fixed rate mortgage at current rates, subject to certain conditions.
Open vs closed mortgages to prepayment
An open mortgage is best suited for those who plan to pay off or prepay their mortgage loan without worrying about prepayment charges. It allows you the freedom to put prepayments toward the mortgage loan anytime until it is completely paid off. An open mortgage may have a higher interest rate because of the added prepayment flexibility, and can be converted to any fixed rate term longer than your remaining term, at any time, without a prepayment charge.
A closed mortgage provides the option to prepay your mortgage loan each year up to 15% of the original principal amount. If you want to pay your mortgage loan off completely before your term ends, prepay more than 15%, or pay off your mortgage loan balance before the end of its term, prepayment charges may apply. A closed mortgage typically has a lower rate than an open mortgage for the same term.
TD Mortgage or TD Home Equity FlexLine?
A TD Mortgage has an amortization period and payments that include principal and interest. This option is common for first-time home buyers
A TD Home Equity FlexLine gives you access to ongoing credit, up to your available credit limit, and provides a number of flexible payment options. You may qualify if you are planning to make a down payment on your home of 20% or more of the purchase price.
A
Agreement of Purchase and Sale (also known as an ‘offer’) - A legal document that sets out the terms for the purchase/sale of a home for a certain price. The offer may be firm (no conditions attached), or conditional (certain conditions – like a house inspection must be fulfilled before the deal can be closed).
Amortization Period - The length of time it would take to pay off your mortgage loan with regular payments and the same interest rate and payment amount. This is usually 25 years for a new mortgage, but can be up to a maximum of 30 years in certain situations.
Appraisal - The process of determining the value of a property, usually for lending purposes. This value may or may not be the same as the purchase price of the home.
Appraisal Value - An estimate of the market value of a property based on an appraisal.
B
Blended Payments - Mortgage payments that include both a principal (the amount borrowed) and an interest component, paid on a regular basis (e.g. weekly, bi-weekly, monthly). Over time, the amount of principal paid increases, while the amount of interest paid decreases, with the total regular payment usually not changing.
Bridge Loan - Short-term financing to help a buyer bridge the gap when the closing date on the purchase of a new home and the closing date on the sale of the current home are different.
C
Canada Guaranty - Canada Guaranty is a mortgage default insurance provider. This insurance protects the mortgage lender against loss if a borrower defaults.
Canada Mortgage and Housing Corporation (CMHC) - The Canada Mortgage and Housing Corporation is a mortgage default insurance provider. This insurance protects the mortgage lender against loss if a borrower defaults.
Certificate of Search or Abstract of Title - A document showing all existing claims to a property, like a deed, mortgages, etc.
Closed Mortgage - A closed mortgage at TD can be paid off at the end of your term without prepayment charges. If you decide to pay off the mortgage at any other time, you may be subject to prepayment charges.
Closing Costs - Various expenses associated with the final purchase of a home. Closing costs can include legal fees, land transfer taxes, adjustments for prepaid property taxes, or condominium common expenses.
Closing Date - The date on which the sale of a property becomes final and the new owner is able to take possession.
Conditional Offer - An offer to purchase a property as long as certain conditions (like a home inspection, you obtaining financing from your bank, selling your existing home) are met. Usually there is a time limit in which the specified conditions must be met.
Conventional Mortgage - A mortgage that does not exceed 80% of the purchase price or value of the home, whichever is lower. Mortgages that exceed this limit must be insured against default (by CMHC or Genworth), and are referred to as high-ratio mortgages.
D
Debt-Service Ratio - The percentage of your gross income that will go towards monthly payments of principal, interest, taxes, heating costs, and condominium fees.
Deposit - Money deposited in trust by the purchaser when making an offer to buy. The deposit is held by the vendor's agent, broker, lawyer or notary until the closing of the transaction.
E
Equity - The difference between the price for which a home could be sold (market value) and the total debts registered against it.
F
Firm Offer - An offer to buy a property with no conditions attached.
Fixed Interest Rate Mortgage - A mortgage for which the rate of interest is fixed for a specific period of time (the term).
Foreclosure - A legal process whereby the lender eventually takes ownership of the property after the borrower has defaulted on payments or other terms of the mortgage loan.
G
Genworth Financial Canada (Genworth) - Genworth Financial Canada a mortgage default insurance provider. This insurance protects the mortgage lender against loss if a borrower defaults.
Gross Debt Service (GDS) Ratio - The GDS looks at your proposed new housing costs (such as mortgage payments, taxes, heating costs, and 50% of condominium fees, if applicable) in relation to your income. Generally speaking, this amount should be no more than 32% of your gross monthly income.
Gross Household Income - The total salary, wages, commissions and other assured income, before deductions, of all applicants for the mortgage
H
High Ratio Mortgage - If a buyer’s deposit is less than 20% of the purchase price (or value of the property, whichever is lower) the mortgage must be insured against payment default by a Mortgage Insurer, such as CMHC.
Holdback - An amount of money withheld during the construction or renovation of a home to ensure contractors are paid.
I
Inspection - The examination of the house by a building inspector selected by the buyer.
Interest Rate Differential Amount (IRD) - A charge you may pay on your closed mortgage if you pay off your mortgage principal prior to the maturity date or pay the mortgage principal down beyond the prepayment privilege amount. The interest rate differential amount is the difference between the principal amount you owe at the time of prepayment and the principal amount you would owe using a similar mortgage rate.
M
Maturity Date - The last day of the term of a mortgage loan agreement.
Mortgagee and Mortgagor - The lender is the mortgagee and the borrower is the mortgagor.
Mortgage Life Insurance - If you die, get a terminal illness, or suffer an accident, your mortgage life insurance may pay benefits.
Mortgage Term - The number of years or months over which you pay a specified interest rate. Terms for TD Mortgages usually range from six months to 10 years.
O
Open Mortgage - A mortgage which can be prepaid at any time, without requiring the payment of an additional charge.
P
Payment Frequency - How often you make your mortgage payments – weekly, rapid weekly, bi-weekly, rapid bi-weekly, monthly or bi-monthly.
Porting - Moving your mortgage to another property while keeping your same mortgage balance, term and interest rate. Saves you money by avoiding early prepayment charges.
Prepayment Charge - A fee you pay the lender when you prepay all or part of a closed mortgage.
Prepayment Privilege - The ability to prepay all or a portion of the principal balance. Prepayment charges may be incurred on the exercise of prepayment options.
Principal - The amount of money borrowed for a new mortgage.
Property Insurance - Your lender will most likely require you to have insurance coverage to protect your home in case of damage from unforeseen circumstances such as fire or natural disasters.
R
Refinancing - Usually done to access additional funds, or to lower other borrowing costs by taking advantage of a lower interest rate. Refinancing can help you consolidate debt or pay for large expenses like education or renovations.
Renewal - At the end of a mortgage term, the mortgage may "roll over" on new terms and conditions (usually length of time and interest rate) acceptable to both the lender and the borrower. This is known as renewing a mortgage. Otherwise, the lender is entitled to be repaid in full.
S
Security - In the case of mortgages, real estate offered as collateral for the loan.
T
Term - The length of the current mortgage loan agreement associated with your interest rate.
Total Debt Service (TDS) Ratio - The percentage of gross income needed to cover monthly payments for housing and all other debts and financing obligations. The total should generally not exceed 40% of gross monthly income.
V
Variable Interest Rate Mortgage - A mortgage for which the rate of interest changes when other market conditions change.
Other useful information
Legal
1If your interest rate increases so that the monthly payment does not cover the interest amount, you will be required to adjust your payments, make a prepayment or pay off the balance of the mortgage.