A newcomer’s guide to key financial terms

Newcomer’s guide to key financial terms: Understanding the financial system in a new country can be hard. We’ve made it a little easier by collecting and defining, a few of the key terms you’ll likely encounter on your financial journey in Canada.

Key banking terms

Chequing account: A common bank account designed for daily transactions like deposits, withdrawals, and bill payments, usually accessed with debit cards. All the major banks offer different chequing accounts, including ones specifically for newcomers.

Savings account: Another common bank account that’s typically used for storing funds for short-term savings. These accounts also provide interest on deposits while providing limited transaction capabilities compared to chequing accounts. It’s a great idea to get both a chequing and savings account when you come to Canada.

Debit card: A payment card linked to a bank account or bank accounts, which gives you direct access to funds for purchases and ATM withdrawals. You’ll be issued one of these when you open a chequing or savings account.

Direct deposit: An electronic payment method where funds are transferred directly into a recipient’s bank account. Direct deposits are typically used for payroll (by your employer to directly deposit your paycheques), government benefits, or other regular income sources. It’s a convenient and efficient way to manage your finances without the need for physical cheques.

E-transfer: Electronic transfer of funds between bank accounts. This is a common way to send and receive money from one account to another in Canada.

Overdraft: When a bank withdraws more money than is available in a chequing account. You’ll often have to pay a fee if you overdraft your account. However, overdraft protection can be purchased with some bank accounts.

Key budgeting terms

Assets: These are the financial resources (such as money, stocks, real estate, and other investments) you own, which have economic value and the potential to generate future earnings.

Cash flow: The movement of money into and out of your accounts over a specific period, such as a month.

Budget: A financial plan outlining expected income and expenses over a defined period. With a budget, you should aim to allocate your money effectively and responsibly to achieve financial goals, manage spending, and prioritize debt payment and saving.

Expenses: Money spent or payments made to purchase goods or services. It’s a good idea to look at your expenses every month to understand how they impact your budget.

Liabilities: Financial obligations or debts owed. These can include loans, mortgages, credit card balances, and other contractual obligations.

Key credit terms

APR (Annual percentage rate): The yearly interest rate charged on borrowed money or credit, including fees and charges. APR provides a way to compare loans and credit cards.

Collateral: Assets you can use as security for a loan. Offering collateral towards loans can help you qualify for different types of credit. Providing collateral means the lender can take and sell it if you default on repayment. This makes it less risky for the lender to offer you the loan.

Billing cycle: The period between billing statements issued by a credit card company, typically ranging from 28 to 31 days.

Grace period: The extra time you get after a payment is due where you can still pay without paying any penalties or interest charges.

Interest: The cost of borrowing money or the return earned on an investment, expressed as a percentage of the original amount. This influences the total amount you have to pay on loans and the growth of savings or investments.

Loan agreement: A legally binding contract between you and a lender outlining the terms and conditions of a loan, including the loan amount, interest rate, repayment schedule, and any collateral or guarantees required.

Key investing terms

Annual return: The percentage increase or decrease in an investment’s value over one year. This provides a measure of investment performance.

Bond: A fixed-income investment representing a loan made by an investor to a borrower, typically a government or corporation, in exchange for regular interest payments and the return of the bond’s original value at maturity.

Capital gain: The profit from the sale of a capital asset, such as stocks, bonds, or real estate, when the selling price exceeds the purchase price, resulting in a positive financial gain.

Capital loss: The financial loss incurred from the sale of a capital asset for less than its purchase price, resulting in a decrease in the asset’s value and a negative impact on the investor’s overall wealth.

Dividend: A portion of a company’s earnings distributed to its shareholders as a form of return on their investment, typically paid quarterly and representing a share of the company’s profits.

Dollar cost averaging: An investment strategy involving the regular purchase of securities such as stocks at fixed intervals, regardless of market conditions. This strategy aims to reduce the effect of price fluctuations and achieve a lower average cost per share over time.

Equities: Ownership of shares in a company. Also known as stocks.

ETF (Exchange-traded fund): A type of investment fund traded on stock exchanges, that groups assets such as stocks, bonds, or commodities together. They offer diversification and liquidity with low management fees.

Fixed-income fund: An investment fund primarily composed of fixed-income securities such as bonds and money market instruments, offering regular income payments that protect your initial investment.

Index fund: A type of mutual fund or ETF designed to track the performance of a specific market index, such as the S&P 500, by holding a diversified portfolio of securities.

Liquidity: How easily an asset can be converted into cash without causing a significant change in its price. This means how easy it is to quickly buy and sell an investment with minimal impact on its value. Cash is considered very liquid. Real estate is much less liquid because it takes time to sell it and receive the funds.

Management fee: The fee charged by investment managers for managing an investment portfolio or fund, typically calculated as a percentage of assets under management.

Mutual fund: An investment that pools money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities, managed by professional portfolio managers.

Portfolio: A collection of investments owned by an individual, institution, or fund, comprising various asset classes such as stocks, bonds, cash equivalents, and alternative investments, designed to meet specific financial objectives and risk tolerance. All your investments together make up your investment portfolio.

Securities: Financial instruments representing ownership in a company (stocks) or a creditor relationship with a borrower (bonds), trading in financial markets and offering potential returns to investors.

Stock: Ownership shares in a corporation represent a claim on the company’s assets and earnings, entitling the shareholder to voting rights and a portion of the company’s profits through dividends and capital appreciation. Also known as equities.

Volatility: How much the price of a financial asset changes over time, indicating the level of risk or uncertainty associated with the investment. Higher volatility means bigger changes in price.

Key mortgage terms

Amortization period: The time it takes to pay off an entire mortgage. The mortgage’s principal amount is gradually paid off through regular payments, typically expressed in years. The longer the amortization period, the lower the monthly payments and the higher the total interest costs.

Closing date: The date a real estate transaction is finalized, and ownership of the property is transferred from the seller to the buyer, typically involving the signing of legal documents and the exchange of funds.

Co-borrower: A person who shares equal responsibility with another borrower for repaying a loan, often used to strengthen the loan application by combining incomes and credit scores. It’s important to note that the co-borrower does not co-own the property being purchased with the loan.

Down payment: The initial upfront payment made by a buyer towards the purchase price of a property, typically expressed as a percentage of the total purchase price. Higher down payments result in lower loan amounts and monthly payments. The minimum down payment for a home in Canada is 5%.

Home equity line of credit (HELOC): A line of credit secured by the equity in a borrower’s home, allowing them to borrow funds up to a certain limit and repay the balance over time with variable interest rates.

Mortgage interest rate: The annual percentage rate charged by a lender on a mortgage loan, representing the cost of borrowing money to purchase a home, with higher rates resulting in higher monthly payments and total interest costs. Interest rates are either fixed or variable. Fixed mortgage rates stay the same for the entire loan term, ensuring your monthly payments don’t change. Variable mortgage rates can change over time based on market conditions, meaning your monthly payments (or the amount of interest you pay) can go up or down.

Mortgage lender: A financial institution (such as a bank) or mortgage company that provides funds to borrowers for purchasing or refinancing real estate.

Mortgage loan: A type of loan used to finance the purchase of real estate, with the property itself serving as collateral for the loan, and typically repaid over a specified term through regular mortgage payments.

Mortgage payment: The regular instalment payment made by a borrower to their mortgage lender to repay the principal amount borrowed and the accrued interest, typically due monthly and consisting of principal, interest, and taxes..

Mortgage renewal: The process of extending or renegotiating the terms of an existing mortgage loan at the end of its term, allowing borrowers to secure a new interest rate or adjust the loan’s duration.

Prepayment: The act of paying off all or a portion of a loan’s outstanding balance before the scheduled due date, potentially reducing the total interest costs and shortening the loan term. Sometimes, prepayment penalties may apply.

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