Mortgages can feel complex, especially with all the unique words and phrases used to refer to various parts of the process.
However, mortgages are also very common. The Financial Consumer Agency of Canada reports that home loans are the “most common and significant type of debt held by Canadians.” About 4 in 10 Canadians currently have a mortgage.
Our list of key terms will make it a little easier to understand the process. You can check out part 1 of our mortgage vocabulary guide for definitions of terms from amortization to down payment. Now, let’s run through the rest of the alphabet.
More Mortgage Vocabulary: Important Words and Phrases for Home Loans Defined
Fixed-Rate Mortgage
The idea behind a fixed-rate mortgage is simple. When you take out this type of home loan, you lock in a specific interest rate. That rate will apply across the term of your mortgage.
Changes in the prime interest rate and other factors won’t affect a fixed-rate mortgage. They offer stability and predictability above all else.
HELOC (Home Equity Line of Credit)
A HELOC is a line of credit that uses your home to secure the loan. A HELOC is very similar to a credit card. You can take money out when you need it, and only pay interest on what’s actually borrowed.
As you pay back the interest and principal, your available credit will increase up to the limit of the loan. As you build equity in your home, HELOCs can help you tap into that value and use it more easily.
High-Ratio Mortgage
A high-ratio mortgage refers to a home loan where less than 20% is offered as a down payment. Because the down payment is below that threshold, you’ll have to pay for default insurance. This increases the overall cost of the mortgage over time but makes it much easier to purchase a home if you don’t have 20% of its purchase price already saved.
Also known as insured mortgage, these mortgages provide the best possible interest rates for the life of your mortgage. Once you purchase the insurance, it is available for the life of the mortgage unless you do something to forfeit the insurance such as refinancing your home.
Open-Term Mortgage
Open-term mortgages offer lump sum and prepayment options along with the standard regular mortgage payments. There are generally no penalties, or at the most very small ones, to make prepayments and additional payments. That can save you money over the life of the loan. By paying down your home loan sooner, you can reduce the total amount of interest that you pay.
The downside is that open-term mortgages have higher interest rates than closed-term mortgages (which usually penalize prepayments and additional payments beyond the regular monthly payment).
Prime Interest Rate
The prime rate is a benchmark interest rate set by the Bank of Canada. While financial institutions don’t have to follow it, it’s a near-universal practice for mortgage lenders to have an identical or very similar rate in place.
The prime interest rate will change based on a range of complex economic factors. Reporting on broad trends can make it easier to understand the direction (up or down) of potential changes, but it’s hard to nail down the specifics before those changes are announced.
Mortgage Principal
Mortgage principal is the foundational cost of your loan — the amount you borrow to pay for your new home. The principal is the sale price of the home minus your down payment. Mortgage interest is calculated based on the principal.
Mortgage Schedule
Mortgage schedules list the amount expected for each payment, as well as the split between money going toward the principal and toward interest. These are also called amortization schedules.
Amortization schedules give detailed amounts of interest and principal payments allowing for greater budgeting and understanding of where your money is being spent.
Mortgage Security
In simple terms, mortgage security means using the home you’re purchasing to secure the home loan you’ll use to pay for it. You allow the bank or credit union to place a charge/lien on the home, which is removed when the loan is paid off. Learn more about mortgage security.
Non-Blended Repayment
A non-blended repayment involves paying back only a specific amount of principal for each payment period. The interest due is then calculated based on how much principal is left to repay. You pay back the principal separately from the interest.
Variable-Rate Mortgage
A variable-rate mortgage is the opposite of a fixed-rate mortgage. The home loan’s interest rate is pegged to the prime rate. That prime rate can fluctuate based on a variety of complex economic factors. You may end up paying more or less than with a fixed-rate mortgage, depending on the movement of the prime interest rate.
Variable rate mortgages are often good choices for revenue properties as they typically will have lower interest rates than fixed rate mortgages. Plus, all interest in revenue property mortgages will be a tax liability.
You will need to monitor variable rate mortgages for fluctuations. You might choose to switch to a fixed rate mortgage if rates become too high or the uncertainty becomes too much.
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