Mortgage Terminology

Mortgage research may be overwhelming, especially if you’re in the beginning stages. While we try to make your experience as easy and simple as possible, there’s a few mortgage terms you’ll probably hear us say and may want to be familiar with before you jump into the journey.

Pre-approval vs. Pre-Qualification

Pre-Qualification
A speculative estimate of your affordability, providing an approximate number for how much you could qualify for as a mortgage for the purchase of a new home.

Pre-Approval
A reliable estimate as to what you can afford and what your lending options are. The pre-approval is based on more in-depth conversation and proven financial information so that you can begin your search with confidence.

An online “pre-approval” or “pre-qualification” is less reliable than speaking with a licensed mortgage expert who has reviewed and verified your qualifying information. If you want to become a homeowner, you need to be pre-approved by a professional person (not a bot or an algorithm).

Down payment vs. Deposit

Down payment
A percentage of the purchase price, typically between 5-20+%, or dollar amount, that you pay upon closing for your new property.

Deposit
A payment buyers provide to the seller upon the acceptance of a firm offer as a form of security. Often required within 24 hours of the offer being accepted, meaning the buyers need liquid assets available in a short window of time.

You need liquidity for a deposit, so having money easily accessible in your bank account is important for house hunting. The deposit acts as a guarantee on your offer, and when your offer is accepted counts towards your total down payment.

Fixed vs. Variable Rate

Fixed Rate
The interest rate for a fixed term mortgage is guaranteed to remain the same for the entire length of the term.

Variable Rate
The interest rate for a variable term mortgage is based on a guaranteed percentage above or below the current Prime Rate. For example, a variable rate of Prime - 1.0% guarantees you will stay 1% below Prime for the entire length of the term. Prime Rate is directly affected by the Bank of Canada’s Overnight Lending Rate, which is monitored and evaluated by the Government 8 times per Calendar Year.

The fixed rate mortgage provides stability and reliability in the monthly payments, whereas the variable rate mortgage provides the possibility to gain a lower rate, with the chance it may fluctuate over the course of the term. Your trusted GreaterThan Mortgage Agent can help you decide which type of term is best for your individual goals based on the current interest rate environment and future economic forecasts.

Term vs. Amortization

Term
The number of years your mortgage rate is guaranteed for. In Canada, fixed rates range from 1-5, 7, or 10-year terms. Most common Variable rates are 5-year terms, although some lenders do offer a 3-year variable term.

Amortization
The total length of time it takes to repay your mortgage according to your payment schedule. For default insured mortgages, the maximum amortization is 25 years, whereas a conventional mortgage allows you to go up to a 30-year amortization if necessary.

Over the life of your mortgage, you will have many terms within your amortization. Each new mortgage term presents the opportunity to reassess your current financial position and secure a new interest rate, either with your current lender or with a new one.

Default Insured vs. Conventional/Uninsured

Default insured
Mortgage default insurance is required if you use a down payment that is less than 20% of the purchase price. A default insurance premium is added into the overall new mortgage amount. The premium is calculated based on the percentage you are using as your down payment.

Conventional or “Uninsured”
Most mortgages do not require default insurance when 20% or more is used as the down payment.

Default insured mortgages allow people to get into the market before having a 20% down payment, at the cost of an additional fee built into the mortgage that insures them in case a homeowner has to default. Uninsured mortgages, due to their higher down payments, do not need to pay for this insurance.

Rate hold
The window of time, typically 90-120 days, in which the lender will guarantee the loan’s interest rate. This ensures that your interest rate will be the same as (or lower than) what you agreed to.

Prepayment penalties
A fee that your lender may charge if you breach the terms of your mortgage, whether that be to pay more than the allowed prepayment amount, or to break the term early by either refinancing or moving the mortgage to a new lender. While the average term length is 5 years, the average life of a mortgage term in Canada is currently around 3 years. This often occurs due to a change in circumstance (outgrowing the home, change in employment or financial position), declining interest rate environment, goals for the property, etc. The advantage of working with a GreaterThan Mortgage Agent is that they get to know you and understand your goals for home ownership as well as your short, mid, and long-term financial goals. This information helps us to ensure we are placing you in the correct product; so if you do need to break that term early, it will be at less of a cost to you.

Closing costs
Additional expenses that occur at the closing of a real estate transaction. These typically include legal fees, Land Transfer Tax, property tax installment, first month’s condo fee (if applicable), 8% sales tax on the default insurance premium, etc. General rule of thumb is to have 1.5% of the purchase price available for closing costs, in addition to the down payment.

While these terms can be daunting, don’t worry, we’re here to guide you through the process, and help you navigate the ins and outs of your homeownership journey.