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How mortgages work in Canada
What is a mortgage?
In its simplest form, a mortgage is a loan used to buy a home or property. Like other loans, a mortgage comes with an interest rate, amortization (repayment) schedule and other terms. With a mortgage, the home itself is used to secure the loan. This means if the mortgage holder fails to make payments, the home could be repossessed by the lender.
Before applying for a mortgage, familiarize yourself with the following concepts. That will help ensure you get the mortgage that’s right for you:
- Term: The amount of time your mortgage contract is in effect. Terms can range from six months to five years or more.
- Amortization: The total length of time that it will take to pay off your mortgage. Most mortgages have amortization periods of five to 25 years. Some buyers qualify for 30-year mortgages. Buyers typically complete several mortgage terms before paying off the loan entirely.
- Interest rate: The amount of interest you will pay on the mortgage. The interest paid is incorporated into your regular mortgage payment; the other portion of your payment pays down the principal amount borrowed.
- Open or closed mortgages: Refers to the level of flexibility in your mortgage repayment terms. If you want to be able to renegotiate, refinance or even repay outside the original terms, you’ll want an open mortgage. A closed mortgage won’t allow for flexibility. However, it will typically have a lower interest rate.
- Fixed and variable rates: With a fixed rate, the mortgage interest stays the same throughout the entire term. With a variable rate, the interest rate can fluctuate as market conditions change.
Fixed vs. variable mortgage rates
When applying for a mortgage, Canadian home buyers can choose between a fixed or variable interest rate. The type of interest rate will influence the total amount of interest paid over the mortgage repayment period. It will also determine whether your interest rate stays the same (“fixed”) or has the potential to change during your mortgage term. To help you understand the differences, let’s compare five-year fixed and five-year variable mortgage rates.
- Five-year fixed mortgage rates: The interest rate is locked in for five years, which means you can predict what your mortgage payments will be for the duration of your contract. Though more predictable than variable rates, fixed rates can be higher.
- Five-year variable mortgage rates: These mortgages also come with five-year terms. However, unlike fixed-rate mortgages, the interest rate charged can change during the contract. Depending on the terms of your mortgage, your regular payment may change or it may stay the same when rates go up or down.
Best mortgage rates available today
Here are some of the best fixed and variable mortgage rates available in Canada right now. To compare rate types and terms, click on the filters icon beside the down payment percentage.
Lender vs. mortgage broker
Some first-time home buyers choose to go directly to their bank for a mortgage because they’re familiar with the financial institution and already do business there. There’s nothing wrong with this approach—some individuals or couples like to keep all of their financial relationships under one roof, so to speak. But you definitely have more options if you compare rates online and/or work with a broker can save you money. A mortgage broker is a professional who will tap into a network of lenders and help you find the best mortgage to meet your needs.
“Going to your bank means your only option is one lender, but going to a broker allows you to access multiple lenders,” including multiple banks and credit unions, Patton says. She adds that some financial institutions serve a niche demographic, like new Canadians or self-employed individuals, and a broker may be able to help you find the one that’s right for you.
How much can I afford on a mortgage?
Once you have a sizeable down payment in hand, the next step is figuring out how much you can afford on a mortgage—the amount you will pay back, with interest, to the lender. The mortgage is calculated as the total cost of your home, minus the down payment.
When you apply for a mortgage, your lender will look at your gross debt service (GDS) ratio and total debt service (TDS) ratio in order to determine how much mortgage a person with your debt and income level can reasonably carry.
Watch: What is mortgage affordability?
These numbers are essentially a test of your income in relation to your debt and anticipated housing expenses, and they will influence the mortgage amount you’re offered. TDS is equal to the expenses of your new home (i.e., your mortgage payments, heating bills, taxes, and any applicable condo fees), divided by your gross household income. GDS is the combination of these same housing expenses, plus your existing debt payments (such as car loans and revolving lines of credit), divided by your gross household income.
Canada’s national housing agency, the Canada Mortgage and Housing Corporation (CMHC), considers a home to be affordable if your GDS and TDS fall within the limits of 39% and 44%, respectively. The Financial Consumer Agency of Canada says your GDS and TDS cannot exceed 32% and 40%, respectively.
