One of the most significant financial decisions Canadians make is purchasing a home. For most homebuyers, a mortgage is essential to achieving the dream of homeownership.
This guide covers everything you need to know about getting mortgages in Canada – from mortgage basics to the approval process and additional considerations. Read on for expert insights to ensure you secure the ideal mortgage loan for your needs.
What is a mortgage?
A mortgage is a loan used to finance the purchase of real estate, primarily a home. The property itself serves as collateral on the loan. If the borrower defaults on their mortgage payments, the lender can take possession of the home through foreclosure.
According to the Canada Mortgage and Housing Corp, Canada’s total residential mortgage debt hit $2.16 trillion as of February 2024, up 3.4 percent from February 2023. In Canada, a mortgage is a legal contract between a lender and borrower outlining the loan’s repayment terms over time. [Source]
While mortgages may seem straightforward, they contain several nuanced components that combine to make up the mortgage experience. These key factors include Principal amount, Amortization period, Interest rate, Loan amount, Mortgage term, and Payment frequencies.
How does a mortgage work?
Now that you understand the core elements of a mortgage, how do they work in practice?
The process typically begins with a homebuyer making a down payment, usually at least 5% of the purchase price, to secure financing. The mortgage loan covers the remaining amount, which, combined with the down payment, equals the total property value.
Over the lengthy amortization period, the borrower repays the mortgage principal and interest through regular installments, often monthly payments. In the early years, payments primarily go toward interest charges. However, as the principal declines over time, more payment is applied to reducing the principal balance.
Once the entire mortgage term expires, the borrower must renew their mortgage arrangement. So, while the amortization stretches for decades, several distinct mortgage contracts finance the overall debt over time.
Different types of mortgages in Canada
Canada’s mortgage landscape offers a range of options with diverse features and benefits. Make sure you understand the flexibility each type provides:
- Open mortgage permits lump sum payments and full payments without prepayment penalties at any time. These mortgages have higher rates but offer maximum flexibility.
- Closed mortgage restricts extra payments in exchange for lower rates. However, some prepayment may be permitted based on the contract terms.
- A portable mortgage lets you transfer your existing mortgage to a new property upon selling your current home. This preserves your favourable interest rate and avoids penalty fees.
- An assumable mortgage makes it possible to transfer your mortgage contract with the same terms to a buyer if you sell the home. They assume responsibility for repayment.
How do you calculate your mortgage payments?
Mortgage lenders use 8 key factors to determine the regular monthly payment amount required:
Principal amount
The principal amount is the amount borrowed from the lender to purchase the property, typically the purchase price minus the down payment plus mortgage loan insurance, if any. The larger the mortgage loan, the higher the monthly payment amount will need to be to repay the borrowed funds over the amortization period.
Mortgage interest rate
The mortgage interest rate charged on the mortgage significantly impacts the monthly payment. A higher interest rate means a larger interest portion making up the monthly mortgage payment. Even small rate increases can raise payments significantly. You can choose between a fixed rate, a variable rate, or a hybrid mortgage.
For more information, refer to Fixed vs. Variable-rate Mortgage in Canada
Mortgage term length
A characteristic of Canadian mortgages is the structured terms and renewal process required. The mortgage term length refers to the period during which the specific mortgage contract and its details are valid.
At the end of the term, the borrower must renew their mortgage arrangement even if it hasn’t been fully paid off yet. This renewal establishes a new contract with potentially revised interest rates, monthly payments, and other details.
Amortization period
The amortization period is the total time to repay the mortgage loan fully. A longer amortization period (up to 25 years) means lower monthly payments but greater interest costs over the entire term. A shorter amortization period leads to higher monthly payments but less total interest the borrower pays.
Payment frequency
Mortgage payment frequency refers to how often installments are made – monthly, biweekly, weekly, etc. Accelerated weekly or biweekly payments reduce the amortization period faster than monthly installments, saving on interest over the loan term.
Property taxes
Many lenders collect property tax funds with each mortgage payment and remit annually to the municipality. Including taxes in payments simplifies home budgeting but increases the amount due to the lender each month.
Mortgage insurance
Mortgage default insurance is required if your down payment is under 20% of the purchase price or in specific situations. The premiums can often be rolled into the loan amount and paid down monthly instead of an upfront lump sum.
Other fees
Other closing costs, such as administrative, appraisal, or other fees, may also be included in your mortgage. Review the complete fee schedule closely and ask your lender to explain each component.
In summary, the larger the mortgage loan, the higher the interest rate, the longer the amortization, and the more fees rolled in, the greater your monthly mortgage payments will be. Use an online mortgage calculator to estimate payments under different scenarios.
Getting approved for a mortgage in Canada
The mortgage approval process evaluates the prospective borrower’s financial standing, particularly:
- Credit score: A major factor determining qualification and pricing. Aim for a credit score over 740. Pay down debts and resolve errors to boost your rating.
- Down payment: A minimum 5% down payment is required. Have documents confirming your savings or other sources of down payment.
- Income: Provide recent pay stubs, tax returns, and employment confirmation proving reliable income to support payments.
- Existing debts: Your capacity to take on a mortgage factors in all current debts, such as loans, credit cards, car leases, and more.
While approval criteria are strict, alternatives exist even if your profile has flaws. If your application with a major bank is initially denied, consult an experienced broker or alternative lender to discuss options.
Mortgage fees and optional add-ons
Beyond the core mortgage loan components of principal, interest, term length, and mortgage default insurance, these additional costs may be involved:
Cash back: Some mortgages offer cash-back incentives, immediately providing a portion of the mortgage funds in cash. This often comes with a higher interest rate.
Property taxes: Many mortgages include tax collection by the lender for convenient remittance to the municipality.
Title insurance: Provides protection against losses from defects or fraud in the legal property title. It is typically a one-time fee at closing.
Mortgage life insurance: Optional insurance covers mortgage payments if the borrower dies.
Mortgage critical illness insurance: Provides funds to pay the mortgage if diagnosed with a covered critical disease.
Mortgage disability insurance: Optional coverage to pay the mortgage if unable to work due to injury or illness.
Carefully evaluate if these extra products fit your budget and offer value justified by their cost.
Renew and refinance your mortgage
If your current mortgage term is expiring, you have two options:
Renew your mortgage
Mortgage renewal involves renegotiating your mortgage terms with your existing or a new lender. It may adjust payment amounts, interest rates, amortization periods, and other variables. However, mortgage renewals are denied in some cases. Be well-prepared for a smooth process.
Refinance your mortgage
Mortgage refinancing means replacing your current mortgage with a new loan, either with your current lender or a new provider. Reasons to refinance include consolidation at a lower rate, changing the amortization schedule, or accessing your home equity. Refinancing often includes penalty fees.
A mortgage broker can assess the renewal versus refinance options available and guide you through the mortgage application process. They have extensive knowledge of the products and pricing from various lenders.
The Process of Securing a Mortgage in Canada
Now that you understand the concept of mortgages, what is the practical process for securing mortgage financing in Canada today? Here are the usual steps:
1. Find a Mortgage Lender
Seek lenders like major banks, credit unions, and mortgage finance companies. Compare interest rates, products, and services. An experienced mortgage broker can be invaluable for accessing multiple lending options through one channel.
2. Get Prequalified or Pre-approved
Lenders will require proof of income, a down payment, a credit report, and other details to assess your application. This mortgage pre-approval determines the lending amount you qualify for.
Pre-approval confirms that you can obtain financing at set terms, giving you confidence in your purchasing power during the home search process. Pre-qualification provides a preliminary estimate without formally reserving funds.
3. Provide Documents Related to the Property
Once you negotiate an offer to purchase a home, submit paperwork like the purchase agreement, appraisal, and legal information to finalize the mortgage approval underwriting process.
4. Mortgage Approval
After all documents are submitted, the lender officially approves the mortgage contract detailing the agreed-upon loan amount, payments, interest rate, term length, and other specifics.
Ready to Get Started with Your Mortgage? Purchasing your dream home in Canada requires expert mortgage guidance. While mortgages may seem complicated initially, our team at Best Mortgage Online can guide you through every step of the mortgage process. Contact us today to get started and find your ideal mortgage loan.
FAQs
What is the minimum down payment for a mortgage in Canada?
In most cases, the minimum down payment for a mortgage is 5% of the purchase price. With less than 20% down, mortgage insurance is required.
How do I qualify for the best mortgage rates in Canada?
To qualify for the lowest rates, aim for a credit score over 740, manage debt levels, provide stable income proof, and make a down payment over 20% to avoid mortgage insurance.
How are mortgage payments in Canada calculated?
Payments are based on factors such as the principal amount, interest rate, amortization period, payment frequency, taxes, and insurance premiums.
What mortgage term length is most common in Canada?
The most common mortgage term in Canada is five years. At renewal, the rate and conditions may change.
What mortgage fees may be involved in Canada?
Potential fees are mortgage insurance for under 20% down, title insurance, appraisal fees, and premiums for optional insurance products.
How soon can I get a mortgage pre-approval in Canada?
With documentation ready, many lenders can provide a pre-approval letter within a few business days to support an offer.
Can I port my mortgage to a new home in Canada?
If you have a portable mortgage, you can transfer your balance and terms to a new property upon selling.
What are mortgage refinancing costs in Canada?
Refinancing fees may include appraisal, title search, legal costs, and mortgage discharge penalties if breaking your existing term.
