Mortgage Terminology, Explained

The total length of time it takes to pay off your entire mortgage — principal and interest — through regular payments. In Canada, the most common amortization period is 25 years, though some lenders offer up to 30 years. A longer amortization means lower monthly payments, but you pay more interest overall.

The length of time your mortgage contract is in effect — including your interest rate, lender, and conditions. Most Canadians choose a 5-year term. At the end of your term, you renew your mortgage (usually with a new rate) until your amortization is complete. The term is not the same as your amortization.

Your interest rate stays the same for the entire term, no matter what happens in the market. Your payment amount is predictable and consistent. This is a good option if you value stability and want to know exactly what you'll pay each month.

Your interest rate moves up or down with the lender's prime rate, which is influenced by the Bank of Canada. Your payment may stay the same, but the portion going toward interest versus principal changes — or in some cases, the payment itself fluctuates. Variable rates have historically been lower than fixed rates over time, but they come with more uncertainty.

The most common type of mortgage. You agree to stay with your lender for the full term. If you break it early — to sell, refinance, or switch lenders — you'll pay a prepayment penalty. Closed mortgages typically offer lower interest rates in exchange for this commitment.

You can pay off your mortgage at any time, in any amount, without penalty. The trade-off is a higher interest rate. Open mortgages make sense if you're planning to sell soon, expecting a large lump sum, or want maximum flexibility.

A lender reviews your income, credit, and finances and confirms how much they're willing to lend you — before you find a property. A pre-approval gives you a rate hold (usually 90–120 days) and helps you shop with confidence. Note: a pre-approval is not a guarantee of final mortgage approval, which happens once a specific property is involved.

The amount of money you put toward the purchase price upfront — the portion not covered by the mortgage. In Canada, the minimum down payment is 5% on homes up to $500,000. Putting down 20% or more means you avoid CMHC mortgage insurance, which saves you money over time.

Required when your down payment is less than 20%. It protects the lender — not you — if you default on your loan. The premium is added to your mortgage balance and can range from 2.8% to 4% of the mortgage amount. CMHC (Canada Mortgage and Housing Corporation) is the most well-known provider, though Sagen and Canada Guaranty also offer it.

The original amount you borrowed — the mortgage balance before interest. Every payment you make reduces your principal (some goes to interest, some goes to principal). As your principal decreases, more of each payment goes toward principal over time.

Interest is the cost of borrowing money, expressed as a percentage of your mortgage balance. In Canada, mortgage interest is compounded semi-annually (twice per year), not daily or monthly like in some other countries. This is an important distinction when comparing mortgage rates.

Most closed mortgages let you make extra payments — without penalty — up to a certain limit each year. Common options are 10–20% lump sum of the original mortgage amount per year, and increasing your regular payment by 10–20%. Using prepayment privileges regularly can shave years off your amortization and save you thousands in interest.

The fee you pay if you break your mortgage before the end of your term. For variable rate mortgages, it's typically 3 months' interest. For fixed rate mortgages, it's usually the greater of 3 months' interest or the Interest Rate Differential (IRD) — which can be significant. This is one of the most important things to understand before choosing a lender.

A penalty calculation used when you break a fixed rate mortgage early. The lender calculates the difference between your original rate and the current rate for the remaining term, and charges you the difference. IRD penalties can be much larger than 3 months' interest, especially when rates have dropped since you signed.

When your mortgage term ends, you renew — either with your current lender or a new one. This is your opportunity to renegotiate your rate and terms. You are not locked in at renewal; you can switch lenders without penalty. Most lenders send renewal offers 4–6 months before your term ends — but the first offer is rarely the best one. This is also the best time to make any changes, such as taking out equity, consolidating debt to improve cashflow, etc.

Breaking your existing mortgage before the term ends and replacing it with a new one — often to access your home equity, consolidate debt, or lock in a better rate. Refinancing usually comes with a prepayment penalty, so it's important to run the numbers to make sure the benefit outweighs the cost.

The portion of your home's value that you own outright. It's calculated as: Current Market Value minus Outstanding Mortgage Balance. As you pay down your mortgage and/or your home appreciates in value, your equity grows. Equity can be accessed through refinancing or a HELOC.

A revolving line of credit secured against your home's equity. You can borrow, repay, and borrow again — up to your approved limit — similar to a credit card, but at much lower interest rates. In Canada, you can borrow up to 65% of your home's value through a HELOC (combined with your mortgage, the total can't exceed 80%). Interest is charged only on what you use.

A federal mortgage qualification rule that requires lenders to confirm you can afford your mortgage at a higher rate than the one you're actually getting. The stress test rate is the greater of 5.25% or your contract rate plus 2%. This applies to all insured and uninsured mortgages in Canada.

Two calculations lenders use to assess affordability. GDS (Gross Debt Service) looks at housing costs as a percentage of gross income — typically must be under 39%. TDS (Total Debt Service) adds all other debt payments — car loans, credit cards, student loans — and must typically stay under 44%. These ratios determine how much mortgage you qualify for.

Items the lender requires before they finalize your mortgage approval. Common conditions include: proof of income, confirmation of down payment, property appraisal, and home insurance. Your mortgage isn't fully approved until all conditions are satisfied — this is handled during the period between your accepted offer and closing.

The date ownership of the property officially transfers to you and the mortgage funds are advanced by the lender. Your lawyer coordinates the legal and financial pieces on this date. Closing costs — land transfer tax, legal fees, title insurance — are due at closing and are separate from your down payment.

The ability to transfer your existing mortgage — including your current rate and remaining term — to a new property when you move. This can save you from paying a prepayment penalty and protect a favourable rate. Portability rules vary by lender, so it's worth understanding before you sign.

When someone buys your home and 'assumes' (takes over) your existing mortgage — including your rate and remaining term. This can be attractive to buyers when current rates are higher than your mortgage rate. Not all mortgages are assumable; it requires lender approval and the buyer must qualify.