Speaking the Language of Mortgages

Whether you go to a bank, trust company or mortgage broker to get a mortgage, people will use legal and financial terms that you don't understand. Here are some of them:

• The mortgagee is the lender.
• The mortgagor is the borrower.
• The principal is the amount borrowed.
• The length of time you have to repay your mortgage is the term of the mortgage. Most Canadian mortgages have terms of no more than five years. Because mortgages are usually for so much money, the monthly payments would be very high if you had to repay the loan in full by the end of a five-year term. In order to make the monthly payments lower, mortgagees usually calculate the payments as if the loan were being repaid over a longer period of time than the actual term of the mortgage – usually 25 years. This make-believe period of time is called the amortization period of the mortgage.
• You must repay not only the principal amount of the loan, you must also pay interest. Some of each monthly payment is used to pay the interest on the loan, and the rest issued to pay down the principal. Payments that combine principal and interest in this way are called blended payments. In most mortgages, the amount you pay every month remains the same (equal monthly installments). As you make each payment, the principal of the loan is slowly reduced. As the principal is reduced, the amount of interest you must pay each month is also reduced, leaving more of your payments to pay down the principal amount of the loan.
• A mortgage with a fixed interest rate has the same rate of interest during the whole term of the mortgage. If your mortgage has a variable interest rate, the mortgage interest starts at one rate but the rate will go up and down over the term of the mortgage as general interest rates go up and down. Different banks offer variations on the variable interest rate mortgage. Some banks allow you to set a maximum interest rate (or cap), or to convert to a fixed-rate mortgage at any time.
• Unless your mortgage specifically says so, you cannot repay the principal amount earlier than the end of the mortgage term. The right to make payments of the principal, over and above your regular monthly payments, is called a pre-payment privilege. A mortgage without any pre-payment privileges is called a closed mortgage. A mortgage with pre-payment privileges is called an open mortgage.
• In most mortgages interest is calculated semi-annually, not in advance. Interest can be calculated or compounded daily, weekly, monthly, quarterly, semi-annually or annually. The more frequently the interest is compounded, the more interest you end up paying. The fact that the interest is calculated not in advance means that you pay interest after you've had the use of the money, not before. So, when you make you June 1 mortgage payment, you are paying for the use of the money for the month of May.