Are you dreaming of buying a home? There are many steps in the homebuying process, and you’re likely to hear a lot of new words along the way. In this article we explain some of the concepts you may come across, in alphabetical order.
This is the time it will take to pay off your mortgage loan in full. If your loan requires mortgage loan insurance through CMHC or Sagen, the maximum amortization period allowed is 25 years. Non-insured, “conventional” mortgage loans can have an amortization period of up to 30 years.
Take a look at the definition of mortgage loan insurance for more details on insured loans.
This is the day when the real estate transaction is official. The paperwork is signed and the money is transferred to the seller.
This is another person or entity that is responsible for the mortgage loan with you. They are also borrowing the money from the lender (or “mortgage creditor”). Remember that you’re still responsible for the payments, even if you have a co-borrower. If the other person doesn’t pay their fair share, you’ll have to pay it for them.
The deed is the legal document proving that the property has been sold and ownership has been transferred. It includes the date of the sale, the price and anything else agreed upon by the seller and buyer.
It confirms that the buyer has become the owner of the property and taken possession of it. The seller will also have received a deed when they originally bought the property, proving that they were the owner.
If a building is a divided co-ownership, this means that each unit is separate from the others and has its own cadastre number (entry in an official register detailing the particulars of the property). This is the most common kind of co-ownership for buildings with many units.
Undivided co-ownership, on the other hand, is a type of shared ownership where there is only one cadastre number for the whole building. For example, if the owner of a duplex wanted to convert it into two units, they could choose this form of co-ownership. The building as a whole belongs to multiple owners, who each occupy specific units as defined in an agreement between them.
The two types of co-ownership have specific features and meet different needs. To buy a unit in a divided co-ownership (a condo), you must have a minimum down payment of 5%. If you’re buying an undivided co-ownership, you’ll need a minimum down payment of 20%.
Note that financing for units in an undivided co-ownership property must come from the same financial institution.
The down payment is the portion of the purchase price that the buyer has to put down themselves. If the property is $500,000 or less, a minimum down payment of 5% of the purchase price is required for a loan with mortgage loan insurance. You’ll have to put down 20% for an uninsured loan. It’s important to remember that the rules are different if you’re buying a house over $500,000, or a rental property, for example.
The down payment is the minimum amount you’ll have to come up with before you can start to think about buying a home. The money for your down payment can come from your personal savings and, in certain cases, you can also tap into your RRSP savings using the Home Buyers’ Plan (HBP).
This is the last day of the term specified in your mortgage loan agreement. Unless you’ve already paid off your loan or renewed early, that means it’s time to renew your mortgage (with new terms: rate, loan type, etc.).
Refer to the definition of mortgage renewal for more information.
A home equity line of credit is a financing product that is secured by your property. It gives you access to funds, often at an attractive interest rate.
If you want to use a HELOC to buy a property, you must have a down payment of at least 20%. If you want to take advantage of this type of financing and your down payment is less than 35%, you would have to take out a mortgage loan to cover the difference.
In the event of an accident or a covered illness leading to disability, mortgage loan disability insurance protects you by paying your loan or line of credit payments once the waiting period is over. (This is the period after you’ve submitted a claim but before a benefit is payable.) Depending on the insurer, the length of the waiting period may either be predetermined or chosen by the insured person when the insurance is taken out. This type of insurance is distributed by financial institutions and life and health insurance representatives. The benefit payable depends on the amount chosen when the policy is taken out.
Critical illness insurance will fully or partially repay the balance of your mortgage loan or line of credit if you’re diagnosed with a critical illness covered by the policy. Again, the benefit payable depends on the amount chosen when the policy is taken out.
Note that some financial institutions require you to take out life insurance too if you want disability or critical illness coverage for your mortgage loan.
This type of insurance is designed to repay the mortgage loan balance if one or more of the borrowers dies. It means that their family will inherit a mortgage-free home.
This type of coverage is sold by many financial institutions as well as by life and health insurance representatives.
The insurance premiums are deducted at the same time as your mortgage payments.
Your lender has to take out this type of insurance if your down payment is less than 20% of the purchase price of the property. It’s usually offered by the Canada Mortgage and Housing Corporation (CMHC) or Sagen. You’re responsible for paying the premium, either up front or by adding it to the amount of your mortgage loan. This insurance is also called mortgage default insurance and it’s designed to protect the lender in the event that the borrower fails to pay.
This is a tax that a buyer must pay when they purchase a home. The amount varies depending on the location and price of the property.
The interest rate tells you how much your loan will cost you. Rates can vary from one financial institution to another. The rate is used to calculate how much you’ll pay in interest.
There are two main types:
This rate remains the same for the entire term, regardless of market fluctuations. In other words, the borrower pays the same interest rate over the entire mortgage term. This means that their payments will always be the same.
Unlike a fixed rate, variable interest rates can vary during the term, because they change based on the lender’s prime rate, which is itself influenced by the Bank of Canada’s key interest rate.
This is the entity, often a financial institution, which lends you the money to buy your property. Also known as the creditor.
A mortgage loan is a loan that helps finance the purchase of a property by an individual or company.
Most buyers don’t have enough cash to buy their property outright, so they have to take out a mortgage from a financial institution. The borrower then has to repay their loan according to a predetermined schedule.
This is the amount you have to pay your lender to repay your mortgage loan. It’s composed of principal and interest. You can choose the frequency of your payments. You’ll usually have the option of paying monthly, weekly or every two weeks.
To find out how much you can borrow and prove your borrowing capacity to sellers, you can ask your financial institution for a mortgage pre-approval certificate. This document doesn’t guarantee that they’ll give you a loan, but it does tell you the maximum amount you could borrow, depending on whether or not the loan is insured. If you start shopping for a home before you know your borrowing capacity, you may be in for a disappointment later.
Your mortgage loan agreement must be renewed no later than the expiry date of your current term. Depending on the amount of your mortgage loan and the length of the term you choose each time you renew, you may have to renew your mortgage several times before you pay it off in full.
This document is the offer made by a potential buyer to the seller of a property. It contains the price they want to pay and other conditions for the purchase. The seller may choose to accept it, reject it, or negotiate. This document is often delivered by the buyer’s real estate broker, if they’re using one.
If you don’t make your payments as set out in your mortgage loan agreement, you are said to be in default of payment. If you find yourself in this situation, contact your lender and try to come to an agreement.
You can pay off your mortgage loan faster by making prepayments. Prepayments can take different forms. You might increase the amount of your regular payments or make an additional payment. This allows you to pay off your loan faster and reduce the amount of interest payable. However, be sure to follow the conditions set out in your agreement to avoid penalties.
These are fees you have to pay your mortgage lender if you repay more of your loan than your mortgage agreement allows for.
There are two main components to each mortgage payment. One part goes toward repaying the principal, the other goes toward interest.
Principal is the money you’ve borrowed. The interest is how much it costs you to borrow that money.
These annual taxes are based on your property’s value and the tax rates in effect in your municipality. They include school taxes (in Quebec) and municipal taxes. Property taxes can often be paid in instalments.
This is when your lender allows you to lock in your interest rate for later. It protects you in case rates go up before you sign your mortgage loan agreement. As a general rule, a rate guarantee is good for between 30 and 120 days.
The term is the period during which you pay back your mortgage loan, in accordance with the conditions (e.g., the interest rate) agreed when you signed your mortgage loan agreement.
When the term is up, you sign a new agreement, and the conditions may be renegotiated and changed. This process continues until your loan is fully repaid.
With an open term, you can repay your loan before the term expiry date or terminate your mortgage loan agreement without penalty.
With a closed term, the number and amount of mortgage payments are set for the duration of the term. You can’t make any additional repayments before the term is up, unless you pay the applicable fees.
This refers to all the costs you may incur in the process of purchasing your home, in addition to your down payment. Examples include legal fees, land transfer tax and moving costs.
You may also have school and property taxes to pay, depending on when you take possession of the property. If you take possession in September, for example, you’ll probably have to reimburse the seller for the taxes they have paid for the rest of the year.
Now you know the terms you need to start the homebuying process with confidence. Don’t hesitate to discuss your plans with your advisor. We’re here to answer your questions.
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