Mortgage in Canada

The amortization period is the total length of time it takes for a borrower to pay off their entire mortgage. This will be longer than the term, with typical amortization periods in Canada being 25 years, with 30-year mortgages or longer becoming more common. A longer amortization period means lower monthly payments, but it also means paying more in interest over the life of the mortgage.

The term is how long your mortgage contract is for. Mortgage terms in Canada can range from 6 months to 10 years, but they typically range from 1 to 5 years. Your fixed rate or variable rate spread will remain the same for your term length. After the term expires, borrowers have the option to renew their mortgage or find a new lender with better rates. You can also refinance a mortgage anytime during a term.

Borrowers can choose how often they make mortgage payments, with common options including monthly, bi-weekly, or weekly mortgage payments. Making more frequent payments through accelerated bi-weekly or accelerated weekly payments can save money on interest in the long run.

Mortgage interest rates can be fixed or variable, with fixed rates staying the same throughout the term and variable rates changing based on your lender’s prime rate. Variable rates are expressed as the prime rate plus or minus a certain percentage, also known as the “spread.” This spread remains the same for your selected term length.

Prepayment penalties are fees charged by lenders if a borrower pays off their closed mortgage before the end of their term, or if they make more prepayments than allowed each year in their mortgage agreement.

A down payment is the initial amount of money that a borrower must pay towards the purchase of a property. In Canada, the minimum down payment required for a home purchase is 5% of the purchase price for homes under $500,000, however, homes over $1 million require a 20% down payment. The portion of the home price over $500,000 but less than $1 million have a 10% down payment requirement.

Lenders use debt service ratios to determine if a borrower can afford a mortgage. These ratios are Gross Debt Service (GDS) and Total Debt Service (TDS). GDS compares the borrower's monthly income to their monthly housing costs, while TDS compares monthly income to housing costs plus other debt payments.

Closing costs are fees associated with finalizing a home purchase, such as legal fees, appraisal fees, property survey and real property report, title insurance, title search, and land transfer taxes. These costs can add up to 2-5% of the purchase price of a property.

Refinancing is the process of replacing an existing mortgage with a new one, typically to borrow more money using built-up home equity, or to lock-in a lower interest rate.

CMHC (Canada Mortgage and Housing Corporation) insurance is required for all mortgages with down payments of less than 20%. This insurance protects lenders in case the borrower defaults on their loan. The cost of CMHC insurance is added to the mortgage and paid off over time. Mortgage default insurance can alternatively purchased from Canada Guaranty or Sagen. These two are private sector alternatives to the CMHC, which is a Crown corporation.

Have a set term and payment schedule, and prepayment penalties if you pay off the loan early or exceed your annual prepayment privileges.

Allows borrowers to make lump sum payments or pay off the entire mortgage without penalty, but come with a higher mortgage rate.

Lenders will review your credit report to determine if you are eligible for a mortgage. Generally, banks want to see a credit score of at least 600. Private lenders might have no minimum credit score requirement.

Lenders want to see that you have a steady income to ensure you can make your monthly payments. Usually, banks want to see at least two years of employment history.

You’ll need to make a down payment of at least 5% to buy a home under $500,000, with homes over $1 million requiring a down payment of at least 20%. Your lender would also check the source of your down payment.

Often with the strictest eligibility requirements, major banks in Canada offer mortgages.

These are member-owned financial institutions that offer mortgages and other banking services.

These are alternative lenders who offer mortgages to individuals with lower credit scores or unique financial situations.

These are professionals who can help you compare different mortgage options from various lenders. There are many lenders who do not offer their mortgages directly to the public and only lend through mortgage brokers.

Private lenders are individuals or companies that provide mortgages to borrowers, who often have bad credit, high debt, or otherwise can’t qualify for a mortgage at a bank, with high interest rates.