When it comes to buying a home, navigating the mortgage process can feel like learning a new language. Terms like "amortization" and "LTV" might leave you scratching your head, but understanding these concepts is essential to making informed decisions. That’s why I’ve put together this simple glossary of common mortgage jargon. Let’s break it down and make your home-buying journey a little easier.
1. Amortization
Amortization refers to the total length of time it will take to pay off your mortgage in full, including both the principal and interest. In Canada, the typical amortization period is 25 years, but some borrowers choose shorter terms (like 15 or 20 years) to save on interest.
Why it matters: The length of your amortization affects your monthly payment amount and how much interest you’ll pay over time.
2. Fixed-Rate vs. Variable-Rate Mortgages
Fixed-rate mortgage: Your interest rate stays the same throughout the term of your mortgage.
Variable-rate mortgage: Your interest rate fluctuates based on changes in the prime lending rate.
Why it matters: Fixed-rate mortgages offer stability and predictability, while variable-rate mortgages can save you money if rates drop but come with more risk.
3. Loan-to-Value Ratio (LTV)
LTV is the ratio of your mortgage loan amount to the appraised value of the home, expressed as a percentage. For example, if you’re buying a $500,000 home and your mortgage is $400,000, your LTV is 80%.
Why it matters: A lower LTV ratio often means better mortgage terms and lower interest rates. In Canada, if your LTV is over 80%, you’ll need mortgage default insurance.
4. Pre-Approval vs. Pre-Qualification
Pre-qualification: An initial estimate of how much you may be able to borrow, based on self-reported information.
Pre-approval: A more thorough process where the lender verifies your income, credit, and financial history to determine the loan amount you qualify for.
Why it matters: Pre-approval gives you a clear budget and shows sellers you’re a serious buyer, making it an important step in the home-buying process.
5. Gross Debt Service (GDS) and Total Debt Service (TDS) Ratios
GDS Ratio: This measures the percentage of your gross income that goes toward housing costs, including your mortgage payment, property taxes, heating costs, and 50% of condo fees (if applicable).
TDS Ratio: This measures the percentage of your gross income that goes toward all your debts, including housing costs, credit card payments, car loans, and other obligations.
Why it matters:Lenders use GDS and TDS ratios to assess your ability to afford a mortgage. In Canada, your GDS should generally not exceed 39%, and your TDS should not exceed 44%. Staying within these limits improves your chances of approval and ensures your mortgage payments remain manageable.
6. Closing Costs
These are the fees and expenses you’ll need to pay on top of your down payment when finalizing your home purchase. Common closing costs include legal fees, land transfer taxes, appraisal fees, and home insurance.
Why it matters: Closing costs typically range from 1.5% to 4% of the home’s purchase price, so it’s crucial to budget for them in advance.
7. Principal vs. Interest
Principal: The original loan amount borrowed.
Interest: The cost you pay to borrow the money, calculated as a percentage of the principal.
Why it matters: Early in your mortgage term, a larger portion of your payment goes toward interest. Over time, more of your payment will go toward reducing the principal.
8. Term
A mortgage term is the length of time your current mortgage agreement is in effect, typically ranging from six months to five years in Canada. At the end of the term, you’ll need to renew or refinance your mortgage.
Why it matters: Shorter terms often have lower interest rates, but longer terms provide more stability in uncertain rate environments.
9. Default
If you miss several mortgage payments, you risk going into default, which can lead to foreclosure. Mortgage default insurance protects the lender in case the borrower can’t repay their loan.
Why it matters: Understanding default risks and avoiding missed payments are crucial to protecting your home.
10. Mortgage Insurance
If your down payment is less than 20% of the home’s purchase price, you’ll need to pay for mortgage default insurance, often provided by CMHC in Canada.
Why it matters: While this insurance protects the lender, it also allows borrowers to purchase a home with as little as 5% down.
Why Understanding Mortgage Terms Matters
Buying a home is one of the biggest financial decisions you’ll ever make, and understanding the terminology is the first step to feeling confident throughout the process. By familiarizing yourself with these key terms, you’ll be better equipped to ask the right questions, compare options, and make informed choices.
If you’re still feeling unsure, don’t worry—that’s where I come in. As your mortgage agent, I’m here to guide you every step of the way and explain everything in plain English. Have more questions? Let’s connect and discuss your options!
Cheers,
Todd
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