Glossary

Amortization Period

The total time it takes to pay off a loan or mortgage. In Canada, the maximum amortization period for a high-ratio mortgage is 25 years. This is not to be confused with a mortgage term.

Conventional Mortgage

A type of mortgage where the loan to value ratio is less than 80%, which means the borrower has 20% or more equity in their home. In other words, the borrower has placed a down payment on a property in excess of 20%. Mortgage insurance is not required on conventional mortgages.

Fixed Mortgage Rate

A mortgage rate where the interest rate and payments stay the same for the agreed upon term. For example, a homebuyer may agree to a 5 year term with a 4.50% interest rate, and for that 5 year period, their mortgage rate and monthly payments would stay the same.

High-Ratio Mortgage

A mortgage where the loan to value ratio is greater than 80%, which means the borrower has less than 20% equity in their home. In other words, the borrower has placed a down payment on a property that is smaller than 20%. Mortgage insurance is required on all high-ratio loans.

Loan to Value Ratio

A ratio, expressed as a percentage, which can be used to compare the amount of equity in a loan to the total value of the loan. The maximum allowable loan to value ratio (LTV) on a Canadian mortgage is 95%.

To find the LTV of a mortgage, one divides the principal amount less the equity by the principal amount. For example, if a borrower needs a loan of $200,000 and has a down payment of $50,000, one does the following calculation ($200,000 – $50,000 / $200,000) which comes out to 0.75 or 75%.

Mortgage Insurance

An insurance policy that protects the lender if the borrower defaults on his or her mortgage. Mortgage insurance is required on all high-ratio mortgages. In other words, mortgage insurance is required if a borrower intends to purchase a property with a down payment less than 20%. Mortgage insurance premiums are paid by the borrower, and are often added to the value of the mortgage.

Mortgage Term

The agreed upon period of time where a loan’s payment schedule stays the same. 5 years is the most common mortgage term length in Canada.

Mortgage Rate

The interest rate charged on a mortgage loan. Mortgage rates can be fixed for a period of time (fixed mortgage rate) or may fluctuate with changes in the market (variable mortgage rate).

Variable Rate Mortgage

A mortgage rate that fluctuates basted upon changes in the market. For example, a borrower may agree to a 5 year variable rate that is pegged on the prime rate. At the start of the mortgage term their rate may be 3.50%, but over the course of the of mortgage term the prime rate may change, and their rate may climb to 4.00% or drop to 3.00% depending on changes in the market.