Buying a home is one of the biggest financial steps most Canadians will take in their lifetime. Whether you’re a first-time buyer or getting back into the market, understanding how mortgages work is essential. With so many terms, conditions and options out there, it can feel overwhelming—but it doesn’t have to be.
In this article, we’ll break down the basics of how mortgages work in Canada, so you can move forward with confidence.
What Is a Mortgage?
A mortgage is a loan you take out to buy a home or other property. The loan is secured against the property itself, which means the lender can claim the home if you stop making your payments. While this might sound intimidating, for most people, a mortgage is simply a structured way to make homeownership possible over time.
How Does a Mortgage Work in Canada?
When you take out a mortgage, you borrow a specific amount of money (the principal) from a lender and agree to repay it, plus interest, over a set period of time. In Canada, the key elements of a mortgage include:
1. Down Payment
The minimum down payment is:
- 5% for homes under $500,000
- 10% for any portion between $500,000 and $999,999
- 20% for homes priced at $1 million or more
If your down payment is under 20%, you will be required to purchase mortgage default insurance, commonly known as CMHC insurance.
2. Principal and Interest
Your mortgage payments cover both the principal (the amount you borrowed) and interest (the cost of borrowing the money). In the early years of your mortgage, a larger portion of your payment goes toward interest.
3. Amortization Period
This is the total time it will take to pay off your mortgage in full. In Canada, the typical amortization period is 25 years. If you have a down payment of 20% or more, you may be able to extend this to 30 years.
4. Mortgage Term
The term is the length of time you’re committed to a specific lender, interest rate, and set of conditions. Terms typically range from six months to ten years, with five years being the most common.
At the end of each term, you can renew, renegotiate or switch your mortgage.
Fixed vs. Variable Interest Rates
One of the most important decisions you will make is whether to choose a fixed or variable rate mortgage.
- Fixed-Rate Mortgage: The interest rate stays the same for the entire term. This provides stability and predictability in your monthly payments.
- Variable-Rate Mortgage: The interest rate may fluctuate based on market conditions. This can lead to lower interest costs over time but comes with more risk.
Some lenders also offer hybrid or adjustable-rate options. A broker can help you decide which is best based on your financial goals and risk tolerance.
Open vs. Closed Mortgages
- Closed Mortgage: Offers a lower interest rate but limits your ability to pay off the loan early without penalties.
- Open Mortgage: Allows for more flexible repayment but typically comes with a higher interest rate.
Closed mortgages are more common in Canada, especially for buyers who plan to stay in their home long-term.
Mortgage Pre-Approval
Before you start shopping for a home, it’s a good idea to get pre-approved. A mortgage pre-approval provides you with a clear sense of how much you can afford and locks in an interest rate for a set period (usually 90 to 120 days). It also shows sellers you’re serious about buying. If you’re interested in a pre-approval, please fill out this form and we’ll get back to you right away!
How to Qualify for a Mortgage in Canada
Lenders will assess several factors when determining whether to approve you for a mortgage:
- Credit score
- Employment history
- Debt service ratios (GDS and TDS)
- Down payment amount
- The property itself
If your financial situation is complex, working with a mortgage broker can help you find lenders who are more flexible or who offer better terms.
What Happens at Renewal?
When your mortgage term ends, you will need to renew it. At this point, you can stay with your current lender or shop around for a better rate or terms. It’s also an opportunity to reassess your needs—maybe it’s time to refinance, consolidate debt, or change your amortization period.
If you’re curious about refinancing options, or want to renew your mortgage on better terms, you can get started with our easy online application. It’s quick, free and there’s no obligation.
Why Work With a Mortgage Broker?
A broker works for you—not the bank. They help you compare options from multiple lenders, guide you through the process, and can often secure better rates or terms than you would find on your own.
Whether you’re buying your first home, renewing, or refinancing, a broker can make the process smoother and less stressful.
Final Thoughts
Understanding how mortgages work is the first step toward making smarter financial decisions as a homeowner. From knowing your payment structure to selecting the right term and rate, having the right information puts you in control.
Have questions or want advice based on your unique situation?
Contact us today. We’re here to help you make sense of the process and support you every step of the way.
