Mortgage Terms

"Arranging to pay for the home is one of the most important financial decisions you will make..."

First mortgage: This is a mortgage given first priority at the registry office. Usually the only financing required. This gives borrowers the best rate of interest.

Second mortgage: A higher interest rate mortgage that provides the borrower with additional financing if the first mortgage does not meet their total financial requirements.

Fully open mortgage, with no penalty of notice: With this type of mortgage, the entire principle or any part of it can be prepaid to the lender at any time, without having to pay any penalty or bonus interest to the lender.

Open mortgage, with a predetermined penalty or notice: All or part of the principle can be prepaid at any time by paying a penalty or giving a set amount of written notice. The amount of the penalty or the notice period would have been predetermined at the time the mortgage was arranged.

Partially open mortgage, with no penalty or notice on that open portion: This type of mortgage is partially open, but not fully open. The mortgage contract permits a limited, fixed percentage to be returned to the lender each year (from 10% or even 20% depending on the lender), in addition to the regular payment without any penalty being paid or notice being given. There may also be some restrictions as to when during the year this prepayment can be made. When the balance of the mortgage is (80% - 90%) and closed, it can only be prepaid if the lender allows - and then of the lenders terms.

Partially open mortgage, with a predetermined penalty or notice on that open portion: As above, this mortgage is partially open, but not fully open. The mortgage contract would allow for a fixed percentage of principal to be prepaid, but subject to a predetermined penalty (i.e. 3 months interest) or with a pre-established amount of written notice. The lender may also have some restrictions as to when the prepayment can be made during the year. The balance of the mortgage is closed and does not allow for automatic early prepayment of the loan.

Fully closed mortgage: These types of mortgages have no pre-payment privileges at all. All mortgages fall into this category unless the prepayment privileges appear right in the mortgage documents - although all mortgages are fully open on maturity.

Convertible mortgage: For those playing the rate game, you get the low rate typically associated with the shorter term, with the freedom to lock in at anytime for longer, if you think rates are headed up. To win, however, you've got to be an assiduous rate-watcher. These mortgages are usually offered with a 3-month, 6-month or 12-month term.

Variable rate mortgage: (VRMs) This is a loan whose interest rate is changed monthly or more frequently to keep it in line with the general interest rate trends. Lenders often set the rate based on their prime-lending rate. While the loan rate changes, the payment may stay level each month. In that case, the amounts going towards interest and principal each month are adjusted to reflect the rate. VRMs are handy mortgages when rates are falling because those rate breaks get passed along quickly as rates are adjusted. Again, with this type of mortgage, you've got to watch the rates. If you fail to act quickly when rates begin to rise, you may also miss the chance to switch to a fixed-term mortgage. Increases in interest rates could create problems if your VRM monthly payment doesn't include any cushion for rate hikes. In that case the lender may require you to increase your payment to prevent a "deficit interest" situation.

Conventional financing: Financing obtained with the loan amount t not exceed 80% of the appraised value. It this is a purchase the lender will generally use the purchase price or the appraised value whichever is less.

High ratio: This loan will exceed 80%. These types of mortgages will allow for up to 100% of the appraised value or the purchase price whichever is less. There will be a fee by the lender for this type of financing. This is usually added to the loan.