The Basics
A mortgage has several moving parts beyond the interest rate. This guide explains the fundamentals of Canadian mortgages, including down payment requirements, mortgage insurance, principal and interest, amortization, mortgage terms, fixed and variable rates, and open versus closed mortgages.
How much do you need for a down payment?
Buying a home is usually one of the largest financial decisions you will make. You find a neighbourhood you like, visit several homes, and eventually find the one you want to buy. Now comes an important question: how much of the purchase will you pay with your own money, and how much will you need to borrow?
The portion you pay with your own money is called the down payment. The remaining amount is typically borrowed from a lender through a mortgage.
In Canada, there are minimum down payment rules:
5% of the first $500,000 of the purchase price
10% of the portion between $500,000 and $1.5 million
For homes priced at $1.5 million or more, mortgage loan insurance is not available, so a minimum 20% down payment is generally required.
Mortgage loan insurance protects the lender if the borrower defaults on the mortgage. The insurance premium (cost of that insurance) is paid by the borrower and is generally based on the size of the down payment. In many cases, the premium can be added to the mortgage rather than paid separately upfront.
When your down payment is 20% or more, the mortgage is generally considered an uninsured mortgage. When your down payment is less than 20%, mortgage loan insurance is generally required, assuming the mortgage is eligible for insurance. For example, if you want to buy a $500,000 home and make 10% down payment, you borrow $450,000. Because your down payment is less than 20%, mortgage loan insurance will generally be required, and the insurance premium may be added to the mortgage balance.
Once you know approximately how much you will need to borrow, you can use our Mortgage Calculator to estimate your monthly or bi-weekly payments and see how different rates and amortization periods affect them.
But the down payment is only the beginning. Once you know how much you need to borrow, there are several other important mortgage characteristics to understand.
Amortization period
The amortization period is the total length of time it would take to repay the mortgage if you made all the scheduled payments according to the original repayment schedule.
Common amortization periods include 15, 20, 25 and 30 years, depending on the mortgage and the borrower's circumstances.
The amortization period is one of the main factors that determines your regular mortgage payment. A longer amortization generally means lower regular payments, but you will typically pay more interest over the life of the mortgage.
Your payment frequency can also vary. You can make payments monthly, biweekly or weekly. Depending on the payment schedule, more frequent payments can help you pay down the mortgage faster and reduce the amount of interest paid over time.
The easiest way to see how these choices affect your mortgage is to try them with real numbers. Our Mortgage Calculator lets you compare different amortization periods, payment frequencies and interest rates to see how they change your regular payment and the amount of interest you will pay over time.
Principal and interest
Every mortgage payment usually has two main components:
Principal – the amount that reduces what you owe on the mortgage
Interest – the cost you pay the lender for borrowing the money
When your mortgage is $500,000, a portion of each payment goes toward interest, and the remainder goes toward reducing your mortgage principal. As you pay down the mortgage, the amount of interest charged generally decreases because interest is calculated based on the outstanding mortgage balance.
Mortgage term
The mortgage term is different from the amortization period.
The term is the period during which the current mortgage agreement, including its interest rate and other conditions, is in effect. Mortgage terms can range from a few months to several years, with terms of one to five years being common.
At the end of the term, the mortgage is not necessarily paid off. Instead, you normally need to renew the mortgage or arrange new financing for the remaining balance.
For example, you might have a 25-year amortization but a 5-year mortgage term. After five years, you will still have many years left to repay the mortgage, but your mortgage term will have ended, and you will need to renew or renegotiate.
This distinction is important: the amortization tells you how long the mortgage is scheduled to take to repay, while the term tells you how long your current mortgage agreement lasts.
Mortgage interest rate
The interest rate determines how much you pay the lender for borrowing the money.
Mortgage rates can generally be fixed or variable.
With a fixed-rate mortgage, the interest rate remains the same throughout the mortgage term. Your scheduled principal-and-interest payment will generally remain consistent during that term.
With a variable-rate mortgage, the interest rate can change during the term, usually in response to changes in the lender's prime rate. Depending on the mortgage, a change in the interest rate may change your regular payment or change how much of your payment goes toward interest and principal.
Your mortgage rate can be different when you renew. As a result, the cost of your mortgage can change significantly over the course of the full amortization period.
Mortgage rates also vary between lenders and mortgage products. Looking at current rates can help put these differences into perspective and give you a sense of what is available in the market today.
Current Canadian Mortgage Rates
These rates are updated regularly and represent some of the best rates currently available from the lenders we track. The rate available to you can depend on factors such as your down payment, mortgage type, property and borrower profile. See all current mortgage rates.
The lowest advertised rate is not always the best mortgage for every borrower. Terms, prepayment privileges and other conditions can also differ between lenders. You can compare mortgage rates and options side by side to see these differences more clearly.
Is the mortgage open or closed?
A mortgage can also be open or closed.
Prepayment means paying more than your scheduled mortgage payment, making an additional payment, or paying off some or all of the mortgage before the end of the term.
An open mortgage generally gives you greater flexibility to repay some or all of the mortgage before the end of the term without the prepayment penalties that may apply to a closed mortgage. This flexibility usually comes with a higher interest rate.
A closed mortgage generally offers a lower interest rate but places restrictions on how much you can repay before the end of the term. Your mortgage may allow certain prepayment privileges, such as making additional payments or paying a specified percentage of the original principal each year. Going beyond those privileges can result in a prepayment penalty. Most of the mortgages offered in Canada are closed mortgages.
The specific rules vary by lender and mortgage agreement, so it is important to understand exactly what prepayment options and penalties apply to your mortgage.
This is also why it is important to compare more than just the interest rate when choosing a mortgage. A mortgage with a slightly higher rate may offer features or flexibility that are more valuable to you. When evaluating your options, compare mortgage rates, terms and features before deciding which mortgage best fits your needs.