Every industry has its own language, and mortgages are no exception. To help you understand the terms and phrases you'll hear when working with a broker, here's a handy reference guide — so you can understand and communicate your mortgage needs with confidence.
Variable Rate Mortgage (VRM): When interest rates change, your mortgage payment typically stays the same.
Adjustable Rate Mortgage (ARM): Unlike a variable rate, your payment changes when interest rates change.
Trigger Rate: When rates rise to the point that your regular principal-and-interest payment no longer covers the interest charged, the extra interest is deferred and the principal balance can grow until it reaches the trigger point.
Trigger Point: When the outstanding principal (including any deferred interest) exceeds the original principal amount. The lender notifies you, and you typically have 30 days to make a lump-sum payment, increase your payment, or convert to a fixed-rate term.
Amortization Period: The number of years it will take to fully repay the mortgage. A longer amortization means lower payments but more interest overall. The typical range is 15 to 30 years.
Closed Mortgage: A mortgage where you've agreed to stay with the lender for a set period. You generally can't pay it off, refinance or renegotiate before the term ends without a penalty — but these often come with lower rates.
Conventional Mortgage: A mortgage that covers no more than 80% of the property's price, meaning you've put 20% or more down. No default insurance is required.
Down Payment: The amount you put toward the purchase up front. In Canada, the minimum is 5% on a home purchase.
Fixed Rate: Your interest rate is locked in for the length of the term.
High-Ratio Mortgage: Where the down payment is less than 20% of the price, requiring mortgage default insurance (through CMHC or another insurer) to protect the lender.
Open Mortgage: A mortgage you can pay off in full at any time without a penalty.
PIT (Principal, Interest & Taxes): A calculation of what you can afford monthly on your home. When heating is included, it's called PITH.
Term: The length of your current agreement with the lender. The most common term is five years, but it can run from one to ten. A longer term usually carries a slightly higher rate for the added security.
Variable Rate: An interest rate that adjusts periodically to reflect market conditions.
Default: Failing to pay your mortgage on time, which puts the loan into default.
Hopefully these leave you feeling more confident about working with a mortgage broker. If a term ever comes up that you'd like explained, that's on me to make clear — never on you to already know.