Term, amortization and other mixed-up words

Mortgage language is not complicated, but it is unfamiliar, and a few words get used interchangeably when they mean entirely different things. Mixing them up leads to real mistakes, so it is worth ten minutes to get them straight.

Term and amortization

These two are the ones people conflate most, and the confusion matters.

Amortization is how long it takes to pay the mortgage off completely. In Canada this is commonly twenty five years, sometimes thirty. It determines the size of your payment.

Term is how long your current contract with this lender at this rate lasts. Commonly somewhere between one and five years. When it ends, you renew, move to another lender, or pay the balance off.

So a twenty five year amortization with a five year term means: the payment is calculated to clear the debt in twenty five years, but the arrangement you have agreed to only covers the next five. At the end of those five years you still owe a substantial balance and you negotiate again.

Almost nobody has one mortgage for twenty five years. They have a series of terms.

Why the confusion causes problems. Stretching your amortization lowers the payment, which feels like a saving. It is not. It is the same debt spread thinner, and the total interest over the life of the mortgage rises considerably. Meanwhile choosing a longer term does not change your payment at all. It changes how long you are locked in and what it costs to leave. People frequently believe they are making one decision when they are making the other.

Principal and interest

Principal is the amount you actually owe. Interest is what you pay for the privilege of owing it.

Every payment is split between the two. Early in an amortization most of each payment is interest and only a little reduces the balance. Later the proportion flips. This is why the balance seems to barely move in the first few years, and it is normal rather than a sign something is wrong.

It is also why lump sum payments early are disproportionately powerful. A lump sum goes entirely to principal, and every dollar of principal removed early stops accruing interest for the whole remaining amortization.

Pre-qualification and pre-approval

Not the same thing, and the gap between them causes real trouble.

Pre-qualification is an estimate. You tell someone your income and debts, they do arithmetic, and you get a number. Nobody verified anything. It is worth roughly what a calculator is worth.

Pre-approval involves a lender actually reviewing your documents and your credit, and committing to a rate hold. It is a considered opinion from someone who can lend.

Neither is a guarantee, because both remain subject to the property and to your circumstances not changing. But a pre-approval means somebody with money looked at your file. If nobody asked for documents, nobody approved anything. Our pre-approval page covers what the process actually involves.

Insured, insurable and uninsured

Three words that sound similar and produce different rates.

Insured. You put down less than twenty percent and default insurance is required. You pay the premium, added to the mortgage. Counterintuitively these often carry the lowest rates, because the lender carries the least risk.

Insurable. You put down twenty percent or more, but the mortgage still meets the criteria that would have allowed insurance. The lender can insure it at its own cost, so rates sit in between.

Uninsured. The mortgage cannot be insured at all, usually because the purchase price is at or above one and a half million, the amortization is longer than twenty five years, or it is a rental or a refinance. Typically the highest rates of the three.

This is why someone putting twenty percent down can be quoted a higher rate than someone putting five percent down. It is not a mistake and it is not a reward for borrowing more. It is who carries the risk.

Open and closed

Closed mortgages restrict how much you can pay off early. Break them and you pay a penalty. Most mortgages are closed, and they carry lower rates because of it.

Open mortgages can be paid off at any time without penalty. They carry noticeably higher rates and only make sense when you know you will pay the mortgage out shortly, for example while a property is being sold.

Standard and collateral charges

This one is buried in the paperwork and matters when you leave.

A standard charge is registered for the amount of your mortgage and can be transferred to another lender at renewal relatively easily and cheaply.

A collateral charge is often registered for more than you borrowed, sometimes up to the full value of the home. It lets you borrow more later without new registration, which is genuinely useful. The cost is that it is harder and more expensive to move to another lender, because the charge generally cannot be assigned and has to be discharged and re-registered, with legal fees.

Ask which one you are signing. It affects your leverage at renewal more than most people expect. Our renewals page explains why switching matters.

Payment frequency, and the accelerated ones

Monthly, semi-monthly, biweekly and weekly are simply how often you pay. Splitting the same annual amount into smaller pieces changes very little on its own.

Accelerated options are different, and the name is unhelpful. Accelerated biweekly takes your monthly payment, halves it, and charges that every two weeks. Because there are twenty six two week periods in a year rather than twenty four, you make the equivalent of one extra monthly payment annually without really noticing. That single change can take years off the amortization.

If you can carry it, it is one of the easiest wins available.

Gross and total debt service

The two ratios lenders use.

Gross debt service measures your housing costs against your income: mortgage payment, property tax, heating, and half of any condominium fee.

Total debt service adds every other monthly obligation: car loans, credit card minimums, student loans, support payments.

On insured files the usual limits are thirty nine and forty four percent. Both have to pass. This is why paying off a car loan can increase your mortgage approval by considerably more than the loan balance itself, because it is the monthly payment being counted, not the debt.

Porting, blending and assuming

Porting is taking your existing mortgage to a new property when you move, avoiding the penalty. Covered in taking your mortgage with you.

Blending mixes your existing rate with a current one, usually to increase the mortgage or extend the term without paying a penalty outright.

Assuming is taking over someone else’s existing mortgage on its existing terms. Rare, and it requires the lender to approve you.

If a word in your documents is not clear

Ask before you sign, not afterwards. There is no such thing as a question that is too basic here, and the words that get glossed over are reliably the ones that cost money later.

Send us the document and we will go through it with you.