How Do Mortgages Work in Canada?

Buying a home is an exciting milestone, but it usually comes with one big question: How does a mortgage work? Put simply, a mortgage is a loan to help you buy a home. Once you’ve paid it off, the home is yours—free and clear.

In Canada, homeownership is a big deal. According to the 2021 Census, about 66% of Canadian households own their homes, and as of November 2024, Canadians owed over $1.5 trillion in mortgages. That’s a lot of people relying on these loans to achieve their homeownership dreams. But let’s be honest—mortgages can feel a little overwhelming, especially if you’re new to the process.

You might explain it like this: “A bank lends you money to buy a home, and you pay it back with interest.” That’s true, but it’s just the tip of the iceberg. Mortgages involve a lot more, and understanding the ins and outs can make a big difference in finding the right one for your situation.

What Exactly Is a Mortgage?

At its core, a mortgage is a loan that helps you buy a home. Since most people don’t have hundreds of thousands of dollars sitting in their savings, they turn to lenders like banks or private institutions to borrow the money. Here’s a quick breakdown of the key parts of a mortgage:

• Principal: This is the amount you borrow—the actual cost of the home minus your down payment.
• Amortisation Period: This is the total time you’ll take to pay off the loan, often 25 years. Think of it as the “big picture timeline.”
• Interest: This is the lender’s fee for letting you borrow their money. The interest rate you agree on determines how much extra you’ll pay.
• Mortgage Payments: These are the regular payments (usually monthly, but sometimes biweekly) that go toward repaying the loan and interest. These payments often also include property taxes, home insurance, and mortgage insurance.
• Term Length: This is how long your current mortgage contract lasts—typically five years. When the term ends, you’ll need to renew the contract with new terms, including a possibly different interest rate.

Here’s the deal: Over the life of your mortgage, you’ll likely sign several different contracts. What works for you today might not be the best fit five years down the road, so it’s important to reassess your options at renewal time.

How Do Interest Rates Work?

Let’s talk about interest—the cost of borrowing money. Rather than charging a flat fee, lenders calculate interest as a percentage of your loan amount. For example, if your interest rate is 5%, you’d pay $5 a year for every $100 borrowed. While this is a simplified example, it gives you the general idea.

Why do interest rates vary?

‍Unlike shopping in a store where prices are fixed, mortgage rates depend on your unique financial profile. Here are some things lenders look at:

• Your Credit Score: A higher score means you’re seen as less risky, so you’re likely to get a better rate.
• Your Income: Stable, secure income reassures lenders you can make your payments.
• Your Other Debts: If you’re already paying off a lot of debt (like student loans or a car loan), lenders may offer higher rates.

But there’s another factor that’s out of your control: the prime rate. This is the rate banks pay to borrow money themselves. When the prime rate goes up, mortgage rates usually follow, and vice versa. So, even someone with stellar credit could get a higher rate if they’re borrowing during a period of high prime rates.

The takeaway? Focus on what you can control: your credit score, income stability, and savings. Trying to predict where interest rates will go can be frustrating, so it’s better to make sure your financial profile is in good shape to get the best deal possible.

Fixed vs. Variable Rates: What’s the Difference?

When choosing a mortgage, you’ll need to decide between a fixed or variable interest rate. Here’s how they stack up:

So, which is better? It depends on your comfort level with risk. A fixed rate is great for stability—you’ll know exactly what you’re paying each month. A variable rate, on the other hand, can save you money if rates drop, but it’s a gamble if they rise.

Can You Pay Off a Mortgage Early?

Sometimes life changes, and you might want the flexibility to pay off your mortgage faster—whether because you’ve come into some extra cash or want to renegotiate your terms. Here’s what you need to know:

• Closed Mortgages: These are the most common. They offer lower rates but come with restrictions on how much extra you can pay off each year. Go over that limit, and you’ll face penalties.
• Open Mortgages: These let you pay off your mortgage anytime without penalties, but the trade-off is higher interest rates.

If you think you’ll want the flexibility to make larger payments or pay off your mortgage early, consider whether the higher rate of an open mortgage is worth it.

Mortgage Terms vs. Amortization Period

Here’s where it can get a little confusing. Your mortgage term and amortization period are not the same thing:

• Term: This is the length of your current contract, usually around five years. When the term ends, you’ll need to renew with a new agreement.
• Amortization Period: This is the total time it will take to pay off your entire loan, often 25 years.

Think of it this way: The amortization period is the marathon, while the term is just one leg of the race. If you opt for a shorter term, you might secure a lower rate, but you’ll need to renew sooner, possibly at a higher rate if market conditions change. A longer term locks in your rate for longer, which can be helpful in times of rising interest rates.

Getting Approved for a Mortgage

Before you can even start shopping for a home, you’ll need to get approved for a mortgage. Here’s what lenders will look at:

• Credit Score: This is a biggie. Lenders want to see that you’re reliable with debt.
• Down Payment: You’ll need at least 5% of the home’s purchase price saved up.
• Income: Proof of steady income reassures lenders you can handle monthly payments.
• Debt Levels: Too much existing debt could limit how much you can borrow.

What if your finances aren’t perfect? You might still have options. Many lenders offer online pre-qualification tools, which can give you an idea of what you might qualify for without affecting your credit score. Once you’re ready to start making offers, you’ll want to get pre-approved, which is a more formal process.

You May Also Like Read: What are the Impacts of the Canadian Economy on Mortgage Rates

Key Takeaway

Understanding mortgages might seem like a lot at first, but it’s worth taking the time to learn. The more you know, the better equipped you’ll be to make smart decisions that bring you closer to owning your dream home. And remember—you don’t have to navigate it alone. A good lender or mortgage broker can guide you through the process and help you find the right fit for your unique situation.

‍Looking for a mortgage broker in Niagara or St. Catharines? Wilson Mortgage can help you find the perfect solution for your dream home. Contact us now for assistance.