When you’re buying or selling a home, there are going to be a few new words and acronyms thrown your way (the financial industry loves acronyms!)
I know from experience these new terms can be overwhelming. You’re already buying a
house, now you need to learn a whole new language?
Luckily, that’s where I can help. You don’t need to know all the mortgage terminology out there, but these are the top six terms you should know when buying or selling a home.
High-Ratio Mortgage
A homebuyer that’s purchasing a home with a downpayment of less than 20% will have a high-ratio mortgage.
All high-ratio mortgages are covered by mortgage loan insurance also known as mortgage insurance. In Canada, there are three mortgage insurers: Canada Mortgage and Housing Corporation, Sagen, and Canada Guaranty.
Most first-time homebuyers are going to have a high-ratio mortgage. They will pay a premium for mortgage insurance. This premium is included in the mortgage.
Low-Ratio Mortgage
Also known as a conventional mortgage, a low-ratio mortgage is one where the homebuyer has made a downpayment of 20% or more of the home’s purchase price.
Because the homebuyer is putting more than 20% down, they are not required to pay mortgage insurance as with the high-ratio mortgage.
There are pros and cons to both types of mortgages. Talking with a broker will help you figure out which one is the best for you.
Mortgage Term
Mortgage term refers to the time period covered by your mortgage agreement. The mortgage term can range from 1 to 5 years or more. After each term expires, the balance of the mortgage principal can be repaid in full, or a new mortgage can be renegotiated at current interest rates.
Amortization Period
The amortization period refers to the number of years it will take to pay off your mortgage through regular payments.
Mortgages are generally amortized over 25 years with an option up to 30 years for conventional mortgages.
Gross Debt Service (GDS) Ratio
Gross Debt Service Ration (GDS) refers to the percentage of your household’s gross monthly income that goes towards your housing payments; mortgage (principal + interest), property taxes, heating and, if applicable, 50% of condo fees.
High-ratio mortgages are required to have a GDS ratio of no greater than 39%.
Total Debt Service (TDS) Ratio
Total Debt Service Ratio (TDS) refers to the percentage of your household’s gross monthly income that goes toward housing costs plus other debts and financing such as car loans, loans, credit cards and lines of credit.
Housing costs include mortgage payments, property taxes, heating, etc. Mortgages that are insured are required to have a TDS of no greater than 44%.
Lenders use your GDS and TDS ratios to assess your mortgage application and to determine how much to loan you and what interest rate to apply.
That’s why I always have to answer “it depends” when someone asks me what my lowest rate is. The interest rate you receive is dependent on all the factors above in addition to the type of residential lender (monoline or bank), type of interest rate, and more.
As I said before, mortgage terminology can be confusing, especially when you start to get into the fine print. Make sure you’re working with a trusted professional to help you navigate your home-buying process.
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