When you’re about to start house hunting in Canada, you’re likely to hear a lot of finance terms, some of which you may not be overly familiar with. Real estate is a niche industry, and, like any, has a lot of jargon. But when you’re talking about making one of the biggest purchases you’ll ever make in your life, it pays to know what these terms mean. Here are five of the most common:
Introduced in January 2018, the stress test is a way that Canadian banks evaluate whether you, as a potential homeowner, will still be financially sound if interest rates rise significantly. If you can’t pass the stress test, you may not be able to borrow as much as you had planned to. A good mortgage broker can help you evaluate your options.
If you opt for this type of mortgage, it means that the interest rate can change throughout the time your loan is being paid off. One advantage to this option is that the rate tends to be lower than fixed-rate mortgages, although if interest rates suddenly rise, you will be stuck paying those higher rates.
On the flip side, you might also opt for a fixed-rate mortgage, where the interest rate will remain at a fixed amount throughout the duration of your loan. Many people prefer the predictability of this option, but it also means that you don’t benefit from a drop in interest rates, should that occur.
Private Mortgage Insurance
In Canada, if you put less than 20 per cent down on the purchase price, you’ll likely be asked to offer proof of mortgage insurance. This protects the lender in the event that the buyer defaults on the loan. This usually costs between 0.5 per cent and 5 per cent of the mortgage loan and is paid in monthly instalments until a certain amount of equity is built up.
People sometimes choose to replace their old loan with a new loan, which is called refinancing. This is usually done to get a lower interest rate or a different payment structure. Depending on your original loan, you might not qualify for refinancing until a certain period of time has passed.