How Does a Mortgage Work in Canada?
A mortgage is a loan that’s specifically used to purchase real estate.
Having a good grasp on how mortgages work allows you to make better decisions about the mortgage that’s right for you.
Mortgage basics
Key components of any mortgage include:
Loan amount (principal): The sum you borrow to buy your home.
Down payment. The cash you pay for your home upfront.
Repayment period (amortization): The amount of time needed to repay the entire loan amount. Twenty-five years is common.
Interest rate: The higher your mortgage interest rate is, the more you'll pay your lender over the life of the loan.
Mortgage payment: This is all-in amount you'll pay — usually every month, but some lenders offer other cadences, such as biweekly. A mortgage payment always includes principal and interest, and sometimes includes property taxes, home insurance and mortgage insurance.
Mortgage length (term): The amount of time a specific mortgage contract remains in place — five years is most common. When the term is up, you’ll renew your mortgage. A mortgage renewal means a new set of terms, including interest rate.
Applying for a mortgage
The mortgage application process can have a few different phases.
Many home buyers start by doing an online pre-qualification, which provides a quick, rough estimate of how large a mortgage you might be approved for. A pre-qualification does not represent an actual agreement between you and a lender.
A mortgage pre-approval, on the other hand, establishes the amount a lender is prepared to loan you. During pre-approval, a lender or mortgage brokerage examines your finances to determine how much to lend you at a particular interest rate. Once pre-approval is completed and your home buying budget is established, you can make a legitimate offer on a home.
After your offer has been accepted, you formally apply for a mortgage.
When applying for a mortgage, you'll be required to provide several financial documents that provide evidence of your current financial situation. These documents, the same ones required during pre-approval, typically include:
An employment letter.
Pay stubs.
Bank statements..
Credit reports.
Evidence of assets, investments and debts.
Mortgage approval
To get approved for a mortgage, a lender will evaluate:
Your credit score. Lenders want to ensure that you’re creditworthy.
Down payment savings. You need to have at least 5% of the purchase price saved to qualify for a mortgage.
Secured income. A letter of employment proves that you have a steady income and will be able to keep up with mortgage payments.
Other debt. If you have student loans, a car payment or other forms of debt, you will have less flexibility to make mortgage payments.
If your financial situation has any red flags — a low credit score or an inconsistent income history, for example — you may still have mortgage options.
How mortgage interest rates work
Interest is the cost of borrowing money. Lenders calculate the cost using interest rates.
The interest rate is applied to the amount you borrow, so if either number increases, you’ll pay more in interest. For example, if your current interest rate is 5%, that means you would pay $5 for every $100 borrowed. This is a very simplified answer as other factors come into play when calculating interest on a mortgage, but you get the idea.
How lenders determine your mortgage interest rate
The interest rate lenders offer you is unique to you and is based on your financial profile. Lenders consider a range of factors, including your credit score, income and any other debt you have. If your application shows markers of lower credit risk, you’ll likely be offered lower rates.
Variable vs. fixed mortgage rates
Mortgage interest rates in Canada generally fall into two types: fixed and variable. Fixed mortgage rates stay the same for the duration of a mortgage term. Variable mortgage rates fluctuate based on changes to a lender's prime rate.
Fixed Rate | Variable Rate | |
|---|---|---|
Interest rate details | Your rate is locked for the entire mortgage term, even if market rates change. | Your rate adjusts if your lender's prime rate changes. |
Pros | Your mortgage payment is predictable. | If rates fall during the mortgage term, your interest payments decrease. |
Cons | If market rates fall, you don’t benefit. | If rates rise, you’ll pay more in interest. |
🗝️ Key takeaway: Trying to predict interest rate movement can lead to disappointment. Instead, to ensure you get the best possible rate, focus on what’s in your control: Your credit score, income, other debt and down payment savings.
Frequently asked questions
What credit score do I need to get a mortgage?
What credit score do I need to get a mortgage?
Traditional mortgage lenders like to see credit scores of at least 680. If your credit is below that, you might still be able to get a mortgage from an alternative mortgage lender, but you'll almost certainly pay a higher interest rate.
Does the type of home I want affect the mortgage I need?
Does the type of home I want affect the mortgage I need?
Yes. The following are just a few examples where some lenders won't offer mortgages or may have additional questions for you,
Investment properties, which include vacation homes.
When looking for a lender, be sure to be upfront about the type of home you're looking for.
What factors should I consider other than interest rate?
What factors should I consider other than interest rate?
Rates are important because they play a large role in determining affordability, but term length, rate type, portability and pre-payment privileges should all factor into a mortgage decision.
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Clay Jarvis
Clay Jarvis
Clay Jarvis
Clay Jarvis