Taking Financial Ownership

Finance, defined

We’re here to give you the resources you need to navigate your financial journey.

Terms and definitions
Adjustable rate mortgage
A mortgage loan that allows the lender to periodically adjust the interest rate in accordance with a specified index. With an adjustable rate mortgage, your interest rate may change from time to time as a result of changes in the prime rate. If the interest rate decreases, your payment amount decreases and if the interest rate rises, your payment amount increases.

Agreement of purchase and sale
A legal agreement between the seller and the buyer of a home. The offer may be firm (no conditions attached), or conditional (certain conditions must be fulfilled before the deal can be closed).

Amortization period
The period of time it will take to fully pay off the mortgage loan This is usually 25 years for a new mortgage, however can be greater, up to a maximum of 35 years.

Annuity
A financial product that pays out a fixed stream of payments to an individual. These are typically a funding source for retirees.

Appraisal
The process of determining the value of property, usually for lending purposes, and is carried out by an appraiser. The appraiser charges a fee for the appraisal report which contains an opinion as to the value of the property and the reasoning leading to this opinion.

Appraisal value
An estimate of the value of the property. This value may or may not be the same as the purchase price of the home.

Annual Percentage Rate (APR)
The annual rate charged for borrowing or earned through an investment.

Asset
Something of value that an individual owns.

Bankruptcy
The legal status if a person or company is unable to repay their debts

Basis point
A unit of measure for interest rates and other percentages referred to in finance. One basis point is equal to 1/100th of 1%

Beacon score
A way to determine a person’s ability to repay borrowed funds based on financial history. A beacon score is based on borrowing history, savings and debts. See also Credit score.

Beneficiary
The individual, institution, trustee, or estate one gives their money, property or any other asset upon death. Beneficiaries may be named in a legal will, insurance or retirement plan, registered product such as a TFSA, or in a trust.

Blended payments
Blended payments are a way of repaying a loan that sets equal monthly payments of principal and interest (blended) over an agreed-upon amortization period.

Blue-chip Stocks
Blue-chip refers to the stock of a company with a reputation and record of strong performance. Blue-chip companies are typically profitable in all financial climates.

Canada Mortgage and Housing Corporation (CMHC)
A Crown Corporation of the Government of Canada that provides mortgage insurance to lenders and protects them from losses resulting from borrower default. The CMHC administers the National Housing Act (NHA) and encourages the improvement of housing and living conditions for all Canadians.

Capital Gains
The difference between the price received when selling an asset and its adjusted cost base. A capital gain is the profit made when a stock is sold for more than the individual paid.

Closed mortgage
A mortgage agreement that cannot be prepaid, renegotiated or refinanced before maturity. With a closed mortgage, paying your balance before the term’s end can result in prepayment charges. However, closed mortgages can offer prepayment privileges, such as the option to make a prepayment of 10-20% of your original principal balance each year without paying a charge. The opposite of a closed mortgage is an “open mortgage”.

Closing Costs
Various expenses associated with purchasing a home. These costs can include, but are not limited to, legal/notary fees and disbursements, property land transfer taxes, as well as adjustments for prepaid property taxes or condominium common expenses, if any.

Closing Date
The date on which the sale of a property becomes final and the new owner usually takes possession.

CMHC Insurance Premium
The amount of money required to be paid in order to obtain mortgage default insurance from CMHC. Mortgage default insurance insures the lender against loss in case of default by the borrower. Mortgage insurance is provided to the lender by CMHC and the premium is paid by the borrower.

Collateral
Assets that are offered as a guarantee that a loan will be repayed. If the loan is not repayed, the collateral is lost.

Compound Interest / Compounding Interest
Interest calculated on the initial principal amount, including any accumulated interest of previous deposits. Compound interest will allow a sum to grow faster than simple interest.

Consumer proposal
An alternative to bankruptcy, a consumer proposal is a negotiated settlement allowing you to make an offer to settle debts with multiple unsecured creditors.

Contribution room
The amount you are able to deposit to a registered plan, such as a Registered Retirement Savings Plan (RRSP). If the contribution limit is not met, the additional room will be available the following year.

Conventional mortgage
A mortgage that does not exceed 80% of the purchase price of the home. Mortgages that exceed this limit must be insured against default, and are referred to as high ratio mortgages.

CPA
Chartered Professional Accountant

Credit Inquiries
When a financial institution checks your credit score with a credit reporting agency to make a lending decision. These typically take place when applying for a mortgage, loan or credit card.

Credit Mix
Credit mix refers to the types of accounts (credit cards, student loans, car loans, or mortgages) that make up your credit report.

Credit score
A way to determine a person’s ability to repay borrowed funds based on financial history. A credit score is based on borrowing history, savings and debts. See also Beacon score.

Credit Utilization
Credit utilization refers to the percentage of total credit available to you that is currently in use. Typically, good credit utilization is less than 30%.

Debt
Borrowed money. The money must be repaid within a set amount of time, with interest.

Debt-Service Ratio
The relationship between what your debt and operating liabilities are compared to your gross income (before tax).

Deed (Certificate of Ownership)
The document signed by the seller transferring ownership of the home to the purchaser. This document is then registered against the title to the property as evidence of the purchaser’s ownership of the property.

Deflation
Deflation is the decrease in the general price of goods and services. Deflation occurs when the inflation rate falls below 0%. See Inflation.

Dividend
A dividend is a payment made by a corporation to its shareholders.

Down Payment
This is the amount of money, including deposit, you put towards the purchase price of a property. If the buyer’s down payment is less than 20% of the purchase price, the mortgage will be a high-ratio mortgage that requires mortgage default insurance.

Equity
The difference between the market value of the property and the total debts registered against it.

ETF
An exchange-traded fund (ETF) is a collection of securities. An ETF may contain all kinds of investments; stocks, bonds or commodities.

Financial advisor
A financial advisor is an individual who gives financial advice including cash management, investment planning, and other advice to help an individual reach their financial goals.

Home Buyer’s Plan
The Home Buyer’s Plan (HBP) allows an individual to withdraw up to $35,000 in a calendar year from an RRSP to purchase a home. Repayment of the funds to the RRSP must begin the second year after the funds were withdrawn, but the home buyer has up to 15 years to repay the funds.

Fixed rate mortgage
A mortgage having an interest rate that does not change during the term. A fixed rate mortgage enables you to know your monthly payment amount and it provides the security of knowing in advance how much of your mortgage principal will be paid off at the end of the term.

Foreclosure
A legal procedure in which the lender eventually obtains ownership of the property after the borrower has defaulted on payments.

GIC
A Guaranteed Investment Certificate (GIC) is a low risk investment, similar to a savings account. A GIC pays a fixed rate of interest over a specified term.

Gross Debt Service (GDS) Ratio
The percentage of a borrower’s gross income (before tax) needed to cover payments for housing costs, including principal, interest, taxes, heating costs and condominium fees (if applicable).

High Ratio Mortgage
A High Ratio Mortgage is a mortgage with a principal amount that is more than 80% of the property’s value. The mortgage must be insured and borrowers must pay an application fee and the mortgage default insurance premium (which could be added to the mortgage).

Inflation
Inflation is the rate at which the average price level of goods and services increase over time.

Interest
Money paid by a borrower to a lender for the use of the lender’s money. The amount of interest charged by a lender is usually expressed as an annual percentage rate called the Annual Interest Rate.

Interest Rate Differential Amount (IRD)
An IRD amount is a compensation charge that may apply if you pay off your mortgage balance prior to the maturity date or pay the mortgage balance down beyond the prepayment privilege amount. The interest rate differential is the difference between the interest rate on your current mortgage term and today’s interest rate for a term that is the same length as the remaining time left on your current term.

Lien
A lien is the right to possess property belonging to another until a debt is repaid.

Liquidity
Liquidity is the degree to which an asset can be quickly bought or sold in the market at a price that reflects its value.

Maturity Date
Last day of the term of the mortgage agreement. The mortgage agreement must be either renewed or the balance paid in full on or prior to the maturity date.

Mortgage
A mortgage is typically a large loan often used to buy or refinance a home or other property. This loan is repaid with interest typically over many years. The property is the security (also known as collateral) for the loan. A mortgage allows the lender to take possession of the property if you don’t repay the loan on time. Because a mortgage loan is secured, the interest rate is usually lower than most unsecured debt and can be a great way to leverage equity in your home towards other investment opportunities.

Mortgage broker
A mortgage broker is a licensed professional who compares mortgages from a variety of lenders to find the best option for their clients based on their specific needs. You generally won’t be expected to pay a broker; they are paid a commission by the lender so there should be no direct cost to you as the client. A mortgage broker will not only work to get you the best rate and terms, but they will also help in providing advice and explaining any fine-print that may exist.

Mortgage Payment Amount
Amount that the borrower is required to pay to the lender on a regular basis during the mortgage term. This amount may vary for adjustable rate mortgages.

Mutual Fund
A mutual fund is a type of financial vehicle made up of a pool of money collected from multiple investors used in order to invest in stocks, bonds, and other assets.

Open mortgage
A mortgage which can be prepaid at any time, without penalty. The opposite of an “open mortgage” is a “closed mortgage.”

Porting
The process through which a borrower transfers or “ports” the remainder of their existing mortgage from one property to a new property. In most cases both the borrower and the property must meet the new lender’s approval criteria.

Pre-approval
A pre-approval is a helpful tool to budget when house hunting. By getting pre-approved for a mortgage, you will be able to determine the mortgage amount you can afford, which will help you budget when you are house-hunting.

Prepayment charge
A prepayment charge is a fee that your lender may charge if you make more than the allowed additional payments toward your mortgage, or if you break your mortgage contract.

Prepayment privilege
The amount of money that a borrower is allowed to pay against the principal balance of the mortgage each year without incurring a prepayment charge.

Prime rate
The prime rate is the annual interest Canada’s banks and financial institutions use to set interest rates on mortgages, loans, and lines of credit. The prime rate is set by the Bank of Canada (BoC). A lender’s prime rate is usually based on the prime rate set by the BoC. The prime lending rate can change at any time.

Refinance
Change the conditions of your mortgage before its maturity date. Often a mortgage is refinanced to obtain a lower interest rate or to take additional funds.

Renewal
When your current mortgage term comes to an end (also known as your maturity date) you may negotiate with your lender to arrange for a new term or consider paying off your mortgage in full.

RESP
A Registered Education Savings Plan (RESP) is a savings plan to help save for a child’s continuing post-secondary education.

Revolving Credit
A type of credit that does not have a fixed number of payments, such as a credit card. The arrangement allows the loan to be withdrawn, repaid, and drawn again an indefinite number of times.

Robo-Advisor
A software-based financial advisor entity that provides advice or investment management online, with little to no human intervention, based on mathematical rules or algorithms.

ROI (Return on Investment)
The ratio between the profit made on an investment and the cost resulting from making that investment in terms of cash or resources. A high ROI is one where the investment gained favorably compared to what it cost.

RRIF
A tax-deferred account registered with the Canada Revenue Agency to generate income from the savings accumulated under the Registered Retirement Savings Plan (RRSP).

RRSP
A Registered Retirement Savings Plan (RRSP) is a registered account to hold retirement savings. Funds that are placed into an RRSP grow tax free until withdrawal, and RRSP contributions are tax-deductible.

RRSP Cutoff Date
Refers to the deadline for contributions to your RRSP at the beginning of a calendar year in order for the contributions to count towards income tax for the previous year.

Secured credit card
A secured credit card is a credit card that requires a security deposit, held as collateral with the financial institution providing the credit card. Secured credit cards are helpful for those with no credit history to help build a credit profile.

Term
Period of time over which the interest rate, payment and other conditions are set. At the end of the term, the loan has to be paid in full or renewed. Not to be confused with amortization period. For example, a mortgage could have a term of 5 years and an amortization period of 25 years.

TFSA
A Tax-Free Savings Account (TFSA) is an account that does not apply taxes on contributions, interest, dividends, or capital gains. TFSA savings can be withdrawn at any time, and withdrawals are tax-free. The maximum amount an individual can contribute to a TFSA is limited. You can find out your contribution room here.

Total Debt-Service Ratio (TDS)
The percentage of a borrower’s gross income (before tax) needed to cover payments for housing costs, including principal, interest, taxes, heating costs and condominium fees (if applicable), and all other debts and obligations, such as loans and credit cards.

Variable rate mortgage
A variable rate mortgage typically carries a lower rate than a fixed-rate mortgage, however a variable rate can increase or decrease during the mortgage term. The variable rate is based on the lender’s prime rate.

Will
A will, also known as a Last Will and Testament, is a legal document outlining how you wish to distribute your assets; property, money and care of minor children after you die.

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