There are many different types of mortgages in Canada. Each mortgage typically has the selection of two different rates:

• Fixed Rate
• Variable Rate

These mortgage rate options will affect how your interest rate changes over time. Fixed rates are historically the most common, followed by variable rates. This changed in late 2021, when variable rate mortgages became more common due to low variable rates and high fixed rates. By the start of 2022, 56.9% of all new mortgages had a variable interest rate, a stark contrast to 24.7% of new mortgages having a variable rate in early 2021. Since then, rapidly rising Canadian interest rates have made variable mortgages unpopular, with only 4.6% of new mortgages in July 2023 having a variable interest rate.

While less common, there are also hybrid/combination rate mortgages in Canada. With a hybrid/combination rate, you’ll have a fixed rate for a certain portion of your mortgage balance, and a variable rate for the remaining portion. This allows you to be partially protected from rate hikes, while partially benefiting should rates decrease.

Your mortgage rate will also be affected by certain factors that your mortgage lender will look at. This includes the mortgage term length, whether it is insured/high-ratio or not, and your credit score and credit history. As always, make sure to have the proper documentation for mortgage applications.

The most common mortgage term is 5 years, with it accounting for 47% of all fixed-rate mortgages in May 2022, but mortgage term lengths can be for as little as 6 months or as long as 10 years. Different mortgage terms have different interest rates because interest rate for a mortgage term depends on the government bond yield of the same maturity. For example, the interest rate for a 10-year term is determined based on the 10-year government bond yield. The term is the period of time that your mortgage contract is valid for. If you have a fixed interest rate, it will remain the same for the length of your mortgage term.

Once your mortgage term is over, you can renew your mortgage or refinance your mortgage. A new mortgage rate will also need to be renegotiated at the end of the term.

The mortgage term that you choose will affect your mortgage rate. Generally, shorter-term mortgages will have a lower mortgage rate, while longer-term mortgages will have a higher mortgage rate. For example, a 4-year fixed mortgage rate will usually be higher than a 1-year fixed mortgage rate. Many Canadian mortgage lenders offer special and attractive mortgage rates for 5-year mortgages due to its popularity and competition between lenders. In 2020, a Bank of Canada working paper found that 80% of all mortgages in Canada were short-term mortgages, with terms ranging from 2 years to 5 years.

Short term mortgages have lower mortgage rates since the borrower will need to renew their mortgage more often. Having a short term mortgage usually means a mortgage with a term length from 6 months to 3 years. Renewing often means that their mortgage rate will be renegotiated more often and will follow current market rates more closely.

For example, consider a 1-year mortgage and a 10-year mortgage. If interest rates rise in one year, the 1-year mortgage will need to be renewed at a higher mortgage rate, while the 10-year mortgage will continue to have the same mortgage rate for nine more years. Borrowers will have increased exposure to interest rate changes in the near-term, which means less certainty. In exchange, short term mortgage rates are often lower.

Long term mortgages, ranging up to 10 years, offer more peace of mind as its mortgage rate will be locked-in for a longer period of time. You won’t need to worry about changes in interest rates in the near future or fuss over mortgage renewals as often. A long term mortgage allows borrowers to lock-in a mortgage rate today if they feel that interest rates will rise in the future. Locking-in your mortgage rate for a longer period of time means that your mortgage lender will want to charge a higher mortgage rate in return.

However, just as a short-term mortgage has a risk of mortgage rates increasing, a long-term mortgage has a risk of mortgage rates decreasing. For example, a 10-year mortgage signed today won’t be able to take advantage of a lower mortgage rate if interest rates fall in the next two years.

There are other considerations to your mortgage term length besides just the mortgage rate. Breaking your mortgage, which happens when you sell your home and move or renegotiate your mortgage before the end of the term, will come with significant mortgage prepayment penalties. You will be able to avoid mortgage penalties if you wait until your term expires. A short mortgage term would be more suitable if you’re thinking of selling your home soon or refinancing your mortgage.

There’s also a chance that mortgage rates might not move in the direction that you’re predicting it will, or it might not move as much as you thought it would. For example, a 10-year fixed mortgage rate might be at 5% while a 5-year fixed mortgage rate might be at 3%.

If interest rates stay the same for the next ten years, you’ll be paying a mortgage rate of 5% while you could have had a mortgage rate of 3% for two 5-year terms.

If interest rates increase by 2%, where the first 5-year mortgage term has a rate of 3% and the second 5-year mortgage term has a rate of 5%, you’ll still be worse-off with a 10-year mortgage as you’re paying the 5% rate for the first five years rather than 3%.

Mortgage rates will need to increase significantly for a 10-year mortgage term to break-even over shorter-term options.

At the end of each term, you have the option to renew or refinance your mortgage.

• Renewing your mortgage involves signing for another term with your existing lender. Your monthly payment and mortgage interest rate may change.
• Refinancing your mortgage involves signing a new term agreement, possibly with a different rate or lender. Since refinancing replaces your existing mortgage with a new mortgage agreement, it allows you to change the terms and conditions of your mortgage. The primary reason for refinancing is for the ability to borrow more money by using your home equity and receiving it in cash.

Your mortgage lender might not reassess your credit score or debt service ratios if you’re renewing at the same lender. If you’re switching to a new lender or refinancing your mortgage, you’ll need to be reassessed and you may need to pass the mortgage stress test.

• A fixed interest rate will not change during your mortgage term.
• A variable interest rate can change during your mortgage term.

Having a fixed rate means that your mortgage rate will not change until your mortgage term is over. You can choose to get a fixed-rate mortgage for a long term length if you think rates will increase soon, or for a short term length if you think rates will stay the same or decrease.

On the other hand, a variable mortgage rate can change at any time. Your mortgage payments will still stay the same, but what changes is the percentage of your payment that goes towards paying off the mortgage principal. If rates decrease, a larger amount of your monthly payments will be going towards your principal. This means that if interest rates decrease, you’ll be able to pay off your mortgage faster with a variable rate.

If interest rates rise, a larger amount of your monthly payments will go towards your mortgage interest. Your monthly payment amount is fixed for the duration of your term, so you won’t have to pay more money if rates rise. However, your mortgage payments must be enough to cover at least your monthly interest cost. If interest rates increase significantly, where your mortgage payment no longer covers the interest cost, then your mortgage payment amount will need to be increased. That’s known as your mortgage’s trigger rate. Some banks have adjustable-rate mortgages, such as Scotiabank, where the payment amount also changes whenever the variable rate changes.

Since variable rates are often already priced at a discount to fixed rates, variable rates would be a better choice if interest rates don’t move at all. Variable rates might still be a better choice if interest rates only increase slightly and later on in your mortgage term.

A fixed mortgage rate would be better if you think interest rates will significantly rise in the near future. Many borrowers also place value on the peace of mind that a fixed mortgage rate gives. The slightly higher mortgage rate might be worthwhile in exchange for not having to worry about interest rate fluctuations.

While the focus can be on the direction of the change, you should also pay attention to how large the interest rate changes can be. Rate hikes and rate cuts by the Bank of Canada can significantly impact Canadian mortgage rates, but they can slow down compared to changes in the past or stop entirely. This can affect your variable vs. fixed rate decision.

Historically, variable rates have performed better than fixed rates, as found in a 2001 study by the Individual Finance and Insurance Decisions Centre. That’s because interest rates have generally fallen over the past few decades, meaning that borrowers with a variable mortgage rate would have benefited from falling interest rates.

In 2020, a low interest rate environment increased the popularity of variable rate mortgages as borrowers were enticed to low mortgage rates. However, rising interest rates in 2022 and 2023 have pushed borrowers back to fixed-rate mortgages.

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The prime rate is an interest rate that is individually set by banks in Canada that is used for their own lending products. Variable mortgage rates will be priced at a premium or discount to the bank’s prime rate. Your premium or discount to the prime rate will remain the same, even if the prime rate changes.

If your variable mortgage had a rate that was a 0.5% discount to the prime rate, then your variable mortgage rate will follow the bank’s prime rate at a 0.5% discount. If the bank’s prime rate was %, your variable mortgage rate will be NaN%. If the prime rate increases to NaN%, your variable mortgage rate will now be %.

The margin between your variable mortgage rate and the bank’s prime rate will depend on your creditworthiness. Low-risk borrowers will be able to get a larger discount (or smaller premium) to prime, while high-risk borrowers will get a smaller discount (or larger premium) to the prime rate.

Prime rates are set by individual banks. For example, RBC sets the RBC Prime Rate (Royal Bank Prime), which is then used for RBC variable-rate mortgages. Most banks will have the same prime rate. For example, CIBC’s Prime Rate will usually be the same as Scotiabank’s Prime Rate or BMO’s Prime Rate. TD uses a different, higher prime rate for their variable rate mortgages. This is called the TD mortgage prime rate, which is 0.15% higher than the TD prime rate.

The Bank of Canada does not set the prime rate or mortgage rates, but they do indirectly affect mortgage rates through their policy rate. The prime rate follows changes in the Bank of Canada's policy interest rate, which is also called the overnight rate. If the Bank of Canada increases their policy interest rate, then banks will in turn increase their prime rate. This will then cause variable mortgage rates to increase.

The insurability of your mortgage will affect your mortgage rate. Insured mortgages are those with CMHC mortgage default insurance or private default insurance from Canada Guaranty or Sagen. The borrower will pay for the mortgage insurance premiums.

Since the lender has zero risk, they will offer the lowest mortgage rates for insured mortgages. The mortgage rates that you see advertised online are often only for insured high-ratio mortgages, which are mortgages with a down payment less than 20%. If you’re making a down payment of 20% or more, you’ll need to look at conventional mortgage rates. Those are rates for uninsured mortgages.

Insured mortgages will need to meet CMHC mortgage requirements. Among these requirements are gross debt service and total debt service ratios below 39% and 44%, as well as limits to how much the home’s purchase price can be and how long your mortgage’s amortization period can be. Conventional mortgages are not restricted to CMHC insurance requirements.

With insurable mortgages, the borrower won’t pay for mortgage insurance. The mortgage won’t be individually insured either. Instead, the lender can choose to bulk insure their portfolio of insurable mortgages and pay for this insurance themselves.

What this means to you is that the cost of mortgage insurance isn’t directly paid by you if mortgage insurance isn’t required. Insurable mortgages will have to meet the same requirements as an insured mortgage, but the only difference is that an insurable mortgage will need to have a down payment of at least 20%. Insurable mortgage rates are also slightly higher than insured mortgage rates.

Uninsurable mortgages are all other mortgages that cannot be insured. This might be because the amortization period is too long, the borrower’s credit score is too low, or their debt levels are too high. Uninsurable mortgages will have higher mortgage rates compared to insured and insurable mortgages.

An insurable mortgage can have a mortgage rate that is around 20 basis points (0.20%) added on top of an insured mortgage rate. Uninsurable mortgage rates will have around 25 basis points to 35 basis points (0.25% to 0.35%) added on top of insured mortgage rates.

Your down payment will reduce the loan-to-value (LTV) of your mortgage. For example, a 20% down payment will result in a LTV of 80%. A higher mortgage down payment means that you’ll be borrowing less compared to the price of your home, which naturally will result in less mortgage interest being paid. You will also likely be able to receive a slightly lower mortgage rate if you make a large down payment, as the risk is lower when compared to a mortgage with a small down payment.

However, this risk of default is eliminated if you make a down payment within a certain range, specifically between 5% and 20%. Making a down payment less than 20% makes it a high-ratio mortgage, which is required to have mortgage default insurance. This can add on from 2.80% to 4.00% of your mortgage amount in mortgage default insurance premiums. There is also often a difference between insured and uninsured mortgage rates. As the mortgage is insured against losses, your mortgage lender is more willing to offer a lower mortgage rate.

In most cases, a high-ratio insured mortgage will have a mortgage rate that is lower than a low-ratio mortgage with a down payment greater than 20%. Why bother saving up for a large down payment if you can make a small down payment and get an even lower mortgage rate? The answer lies in the cost of the mortgage default insurance, which isn’t free.

CMHC insurance premiums can add thousands of dollars to the cost of your mortgage. The cost of this mortgage default insurance will either need to be paid upfront or it will be added to your mortgage principal balance. Adding the cost of the mortgage insurance to your principal means that you will be paying interest on the insurance over time, adding on to the cost of your mortgage. The CMHC insurance premium will depend on the size of your down payment.

Source: CMHC Mortgage Loan Insurance Cost

You can avoid paying for mortgage insurance by making a down payment that is 20% or more. This would be equivalent to a LTV of 80%. A down payment of 35% or more (which would be a LTV of 65% or less) can also give you access to lower mortgage rates.

For example, a 5% down payment might give you a mortgage rate of 2%, but you'll have to pay for mortgage insurance. A 20% down payment might have a mortgage rate of 2.4%, and a 35% down payment might have a mortgage rate of 2.15%. Insured mortgages might have a slightly lower mortgage rate, but the difference is reversed when you add in mortgage insurance costs that the borrower pays.

Let’s look at the monthly cost for a $500,000 home with a 5-year fixed term, 25-year amortization, and monthly payments.

To see the difference more clearly, let’s look at the difference between a 19% down payment for an insured mortgage and a 20% down payment for an uninsured mortgage.

In this example at these fictional interest rates, there is little difference between making a 19% down payment for an insured mortgage or a 20% down payment to make it uninsured. The added CMHC premiums compensate for the difference in mortgage interest rates. If the difference in mortgage rates was smaller, an uninsured mortgage would have been better.

However, if you’re able to afford to make a large down payment, your total interest paid and your monthly mortgage payments will be much smaller.

Having a bad credit score won’t just cause you to have higher mortgage rates, but it can also make you ineligible for certain mortgages. CMHC mortgage rules require borrowers of high-ratio insured mortgages to have a credit score of at least 600. If your credit score is below 600, you won’t be able to get an insured mortgage.

Generally, the minimum credit score for a mortgage from a major bank is 600. Borrowers with bad credit scores will usually need to get a mortgage from a private mortgage lender or B lenders, which are non-traditional lenders that have less strict requirements. You’ll need to have a down payment that is larger than 20% for a B lender mortgage or a private mortgage. Private mortgage rates are also quite high in comparison to a mortgage from a bank. However, B lenders can still offer competitive rates. For example, credit union mortgage rates can often be lower than mortgage rates from the big banks.

For newcomers to Canada with no Canadian credit history, some major banks offer newcomer programs that allow those with no credit history to get a mortgage.

Having an established credit history and a good credit score can give you access to lower mortgage rates. It’s a good idea to monitor your credit report to make sure that it’s accurate and to look out for any negative credit data, such as missed bill payments. Missed payments can stay on your credit report for years, which can make it harder to qualify for a mortgage at a favourable mortgage rate. There are plenty of ways to check your credit score for free in Canada too. Working to improve your credit can save you thousands of dollars in interest through a lower mortgage rate.

Did you know that almost half of all homebuyers in Canada used a mortgage broker to negotiate their mortgage? The 2023 CMHC Mortgage Consumer Survey found that 43% of buyers in 2023 used a mortgage broker to get their mortgage, slightly down from 51% in 2022. The most common reason for homebuyers to use a mortgage broker is to get a lower mortgage rate or a deal on their rate, which 85% of buyers felt would be the case as reported by the 2021 CMHC Mortgage Consumer Survey, but mortgage brokers also provide other benefits.

Brokers can help you save time, they can help give you advice on what type of mortgage would be right for you, and they can also help you if you have a special circumstance, such as if you’re buying an unusual property, rely on self-employment income for a mortgage, or if you have a low credit score. You might also need to use a broker in order to get a mortgage from some B lenders and private lenders.

Working with a mortgage broker is a great way to have access to multiple mortgage lenders and to have someone working on your behalf to get you the best possible mortgage rate. However, some brokers might not work with specific mortgage lenders, and it isn’t guaranteed that they’ll be able to find a low mortgage rate for you.

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Having a mortgage broker doesn’t mean that you shouldn’t do any research or try to compare mortgage rates yourself. In fact, 87% of Canadians compared mortgage rates online before buying a home, with almost half of Canadians using both a mortgage broker and contacting mortgage lenders themselves. Using this page to source mortgage rates from different lenders is a great way to start your mortgage search.

You might be able to directly ask a bank to match the mortgage rate that a broker gives. Brokers might not always be able to find the lowest mortgage rates either. If you’re working with a mortgage broker but have found a better mortgage rate directly from a bank, you’re not obligated to complete the transaction with your mortgage broker. You can ask your broker to try to match or get a better rate, but that might not always be possible.

Amortization Period

The amortization period is the total length of time over which you plan to pay off your mortgage. The longer your mortgage’s amortization period, the smaller each of your mortgage payments will be. While your scheduled payments will be smaller, it does mean that you will be paying interest for a longer period of time, and it will increase your total cost of borrowing.

A shorter amortization means that you will be paying off your mortgage faster. Having your mortgage paid off more quickly means that you will save on interest costs, but your mortgage payments will have to be larger.

Here's what you need to know about amortization:

• The most common amortization period in Canada is 25 years.
• Choosing a shorter amortization period will lower your lifetime interest cost, but will result in a higher monthly or bi-weekly payment.
• Default insured mortgages can have a maximum amortization period of 25 years. If you want an amortization period of over 25 years, you must make at least a 20% down payment.

When deciding between a short amortization or a long amortization, you will need to take into account your financial situation. A long amortization means that your individual mortgage payments will be smaller, which might allow you to qualify for a larger mortgage amount based on your future debt service ratios. Likewise, higher mortgage payments from a shorter amortization may reduce the mortgage amount that you can afford.

You won’t be able to get a CMHC-insured mortgage if your amortization is more than 25 years. While your monthly mortgage payment might be higher with an amortization that is 25 years or less, you’ll be able to make a smaller down payment that can be as low as 5%. Otherwise, you’ll need to make a down payment of at least 20% for an uninsured mortgage with an amortization greater than 25 years.

You can use our mortgage amortization calculator to see how changing your amortization period can affect the cost of your mortgage. For example, the table below compares the cost of a mortgage and the amount of each monthly mortgage payment for different amortization periods.

When comparing 20-year and 30-year amortizations to the 25-year amortization at a 2% mortgage rate:

• A 20-year amortization increases your monthly mortgage payment by $412/month, but reduces your total interest cost by $28,116
• A 30-year amortization reduces your monthly mortgage payment by $269/month, but increases your total interest cost by $30,139

If you can handle higher monthly mortgage payments, a shorter amortization period can save you thousands of dollars. Many banks and mortgage lenders also allow you to shorten your amortization period by making additional mortgage prepayments, such as through lump-sum principal prepayments, doubling your regular payment amount, and increasing your payment schedule.

The payment frequency determines how often you will make mortgage payments.

• A monthly mortgage payment is made once per month (12 times per year).
• A bi-weekly payment is made once every two weeks (26 times per year).

While we cannot give advice for your specific situation, here are some general guidelines:

• Most people choose to synchronize their mortgage payments with their monthly or bi-weekly paycheck.
• Choosing a bi-weekly payment schedule will slightly lower your term and lifetime mortgage cost.

More frequent mortgage payments means that each mortgage payment will be smaller. However, mortgage payments do not scale linearly. For example, a bi-weekly mortgage payment amount is not exactly half of a monthly mortgage payment amount. Instead, bi-weekly payments are slightly less than half of a monthly payment.

Many mortgage lenders offer accelerated payment frequencies, such as accelerated bi-weekly and accelerated weekly mortgage payments. With accelerated payments, you will be paying the equivalent monthly payments, which means that you will be making an extra mortgage payment per year.

For example, for a $500,000 mortgage with a 25-year amortization and a mortgage rate of 2%, a monthly payment would be $2,117, while a bi-weekly payment would be $977. To calculate the accelerated bi-weekly payment amount, you would divide $2,117 in half to get $1,058.50. Your accelerated bi-weekly payments will be $1,058, higher than a regular bi-weekly amount of $977. This increased amount allows you to pay off your mortgage faster, which shortens your amortization and saves you interest.

Switching to accelerated bi-weekly and accelerated weekly payments can save you thousands of dollars over the life of your mortgage. At the same time, you’ll also still be paying the same amount each month as a regular monthly mortgage payment.

You may often notice a significant difference in mortgage rates between open and closed mortgages. Open mortgages allow you to make principal prepayments at any time without any charges or penalties, which makes it very flexible. This flexibility is counterbalanced by open mortgage rates being higher than closed mortgage rates.

Choosing a closed mortgage can let you access much lower mortgage rates at the risk of prepayment penalties if you go over your lender’s annual prepayment limit. Things like selling your home or a mortgage refinance can cause you to have to pay significant prepayment penalties. This could be avoided with an open mortgage, but you’ll have to pay a higher mortgage rate.

The mortgage industry is well established in Canada, with thousands of mortgage brokerages across the country. Mortgage Professionals Canada, the industry's trade association, has over 15,000 members and accounts for 35% of all mortgages in Canada.

In Ontario alone, mortgage brokerages arranged $131.4 billion in mortgages in 2018, from 2,649 mortgage brokers and 11,708 mortgage agents. That has since grown to 2,749 mortgage brokers, 13,179 mortgage agents, and 1,251 brokerages in Ontario as of March 31, 2021.

The massive volume that mortgage brokers process comes to no surprise, as Canada’s outstanding mortgage debt passed $1.6 trillion in 2022, up from the $1.5 trillion debt seen in 2021.

If you’re a mortgage broker looking for mortgage leads or real estate advertising, contact us to learn more.