What Is a Mortgage and How Does It Work in Canada?

Buying a home is one of the biggest financial steps most Canadians take. But before beginning your home-buying journey, it’s important to understand what a mortgage is, how it works, and what affects your payments and approval. This guide breaks down the basics in simple, clear terms so you can make informed decisions.

🏦 What Is a Mortgage?

A mortgage is a loan used to buy a home or property. You borrow money from a bank, credit union, or mortgage broker, and repay it over time with interest.

Your home acts as collateral, meaning the lender can take possession (via power of sale) if payments aren’t made—but this is always a last resort.

🔑 How a Mortgage Works in Canada

1. Down Payment

Your down payment determines how much you need to borrow. In Canada, the minimums are:

• 5% — homes under $500,000

• 10% — on the portion between $500,000 and $999,999

• 20% — homes $1M+

If your down payment is under 20%, you must purchase CMHC mortgage insurance.

2. Mortgage Term

The term is how long your rate and conditions last. Common terms are:

• 1-year

• 2-year

• 3-year

• 5-year (most popular in Canada)

At the end of each term, you either renew, refinance, or switch lenders.

3. Amortization Period

The amortization is the total time it takes to pay off your mortgage.

• 25 years (default with CMHC insurance)

• 30 years (for uninsured buyers with 20% down)

Longer amortization = lower payments but more interest over time.

4. Interest Rates

You can choose between:

Fixed Rate

• Stays the same for the entire term

• Predictable payments

• Good for budget stability

Variable Rate

• Moves with the lender’s prime rate

• Can increase or decrease

• Lower initial rates in many cases

Rates move based on:

• Bank of Canada policy

• Bond yields

• Inflation

• Market conditions

Comparing rates through mortgage brokers often provides better savings.

5. Mortgage Payments

Your payments include:

• Principal (the amount you borrowed)

• Interest

• Sometimes property taxes

• Sometimes mortgage insurance

You can choose:

• Monthly

• Semi-monthly

• Bi-weekly

• Accelerated bi-weekly

Accelerated payments help you pay off your home years sooner.

🧮 The Mortgage Stress Test

To qualify for a mortgage, Canadians must pass the OSFI mortgage stress test. Lenders approve you based on the greater of:

• Your actual rate + 2%
  or

• The government benchmark rate
  (This ensures you can afford payments if rates rise.)

📝 How to Qualify for a Mortgage in Canada

Lenders look at:

• Credit score (680+ preferred)

• Income stability

• Debts (TDS + GDS ratios)

• Down payment source

• Employment history

• Property type & location

If you fall short on one area, a mortgage broker can find lenders with flexible programs.

🏡 Types of Mortgages in Canada

1. Conventional Mortgage

20%+ down payment, no mortgage insurance.

2. High-Ratio Mortgage

Under 20% down, CMHC insured.

3. Open Mortgage

Flexible—can pay off anytime, usually higher rates.

4. Closed Mortgage

Lower rates, limited prepayment privileges.

💡 Why Understanding Mortgage Basics Matters

Knowing how mortgages work helps you:
✔ Choose the right lender
✔ Compare rates wisely
✔ Avoid penalties
✔ Save thousands in interest
✔ Buy with confidence

🔍 Is a Mortgage Broker Better Than a Bank?

In many cases… yes.
A mortgage broker:

• Compares rates from dozens of lenders

• Finds programs banks won’t offer

• Helps with pre-approval

• Saves you money

• Provides faster approvals

Banks only offer their own products.

🚀 Final Thoughts

Understanding how mortgages work in Canada puts you in control of your home-buying journey. With the right knowledge—and the right mortgage partner—you can secure a competitive rate, build equity, and move into a home you love with confidence.