A mortgage is a long-term loan secured by real estate. In Canada most first mortgages run 25–30 years (“amortization”) but are priced in shorter “terms” (one to ten years) after which you renew at the current market rate. Payments can be fixed or variable, weekly to monthly, interest-only to accelerated bi-weekly. Because the home is collateral, mortgage rates sit well below credit-card or personal-loan levels—yet missing too many payments can lead to foreclosure.
Mortgage Types
High-ratio (insured) mortgage. Down-payment under 20 %. Requires default-insurance premium paid to CMHC, Sagen, or Canada Guaranty; premium can be added to the loan.
Conventional mortgage. Down-payment 20 % or more; no insurance premium; lender risk is lower, so rates can be slightly better.
Fixed-rate mortgage. Rate locked for the full term; payment never changes during that period—ideal for predictable budgeting.
Variable-rate mortgage. Rate floats with the lender’s prime. Payment may stay constant (adjusting interest vs. principal mix) or fluctuate. Historically cheaper but riskier if rates spike.
Hybrid / split mortgage. Part fixed, part variable—balances cost savings with rate security.
The Mortgage Process
- Pre-qualification. Estimate borrowing power using income, debts, and credit score.
- Pre-approval. Formal application, credit pull, and income verification. Receive a letter locking today’s rate for 90–120 days.
- Offer & appraisal. You choose a property; lender orders an appraisal to confirm value.
- Final underwriting. Lender reviews appraisal, title search, and remaining documents; issues mortgage commitment.
- Closing. Lawyer/notary registers the mortgage, disburses funds to the seller, and you take possession.
Eligibility & Approval Factors
- Credit score. 680+ for best rates; insured mortgages accepted down to ~600 with strong files.
- Income & employment. Stable salary, hourly, or two-year average of self-employed income; bonus/OT usually averaged over two years.
- Down payment. Minimum 5 % up to $500k purchase price, then 10 % on the portion from $500k–$1 million. Purchases over $1 million require 20 %.
- Debt-service ratios. Gross Debt Service (GDS) ≤ 39 % and Total Debt Service (TDS) ≤ 44 % of gross income (may flex to 50 % for strong credit).
- Stress test. Must qualify at the greater of the contracted rate + 2 % or the Bank of Canada benchmark (currently 5.25 %).
Costs & Fees
Prime fixed five-year rates (Spring 2025) sit around 4.6-4.9 %. Variable rates track prime minus/plus a discount or premium (prime currently 7.20 %). Closing costs include:
- Appraisal – $300-$500 (sometimes waived on insured files)
- Legal & title insurance – $900-$2,000
- Land transfer tax (varies by province; first-time buyers may get a rebate)
- CMHC/Sagen/Canada Guaranty premium on high-ratio loans (2.8 %–4 % of principal)
Lenders allow lump-sum prepayments of 10-20 % annually and payment increases of up to 100 % without penalty; full early discharge triggers the greater of three months’ interest or IRD (interest-rate differential).
Refinancing & Renewals
When a term ends you can renew with the same lender, switch to another (called a transfer), or refinance for a larger amount (cash out). Refinancing is capped at 80 % loan-to-value and incurs new legal fees and possibly a penalty if done mid-term. Homeowners often refinance to access equity for renovations or debt consolidation at mortgage-level rates.
Responsible Borrowing Tips
- Stress-test your budget at two percentage points above today’s rate—even if already required—to ensure comfort if rates rise.
- Choose accelerated bi-weekly payments to shave years off amortization without feeling the pinch of large monthly hits.
- Use prepayment privileges every year (tax refund, bonus) to slash total interest.
- Keep an emergency fund; property repairs and rate-rise shocks hit hardest when cash reserves are thin.
Alternatives & Add-Ons
- HELOC (revolving line of credit secured by the home; interest-only minimum payments – useful for staged renovations).
- Second mortgage (higher rate, shorter term, smaller closing costs; bridges short-term equity-access needs).
- Portable mortgage (move existing rate and penalty credit to a new property if you sell and buy within a set window).
Pros & Cons
Pros: Lowest consumer borrowing cost, potential home-value appreciation, mortgage interest may be tax-deductible if funds used for qualified investments, predictable amortization.
Cons: Closing costs, stress-test limits borrowing power, rate-reset risk at renewal, foreclosure risk if payments lapse.
Frequently Asked Questions
How long does mortgage approval take?
Full approval usually arrives within 5–10 business days once the appraisal and all documents are in.
Fixed or variable – which is better?
Fixed gives payment certainty; variable has historically cost less but can jump with prime. Consider risk tolerance and cash-flow flexibility.
What is the “stress test”?
A federally mandated buffer requiring you to qualify at the higher of your contract rate + 2 % or the Bank of Canada benchmark, ensuring affordability if rates climb.
Can I use gifted down-payment funds?
Yes, from an immediate family member. You’ll need a signed gift letter and proof the money has been deposited in your account before closing.
How much should I budget for closing costs?
Plan on 1.5 %–2 % of the purchase price for legal, appraisal, land-transfer tax, and adjustments.
Is mortgage insurance (life/disability) mandatory?
No, but it’s offered to cover payments or the balance if illness or death occurs. You can decline or shop independent policies.