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Mortgages 101

Learn the basics of applying for a mortgage and compare the best mortgage rates in Canada.

Getting a mortgage in Canada

For first-time homebuyers, comparing and choosing a mortgage is a major financial decision. It should involve thorough research. Picking a mortgage requires you to assess your financial situation and your ability to handle the monthly payments.

What is a mortgage?

If you are looking to purchase a home, chances are you don't have the funds on hand to cover the cost. Like most homebuyers, you'll need to apply for a mortgage. Mortgages are loans secured against property.

Having a mortgage allows you to buy and use the property, without paying the full amount upfront. In exchange, you are required to make regular mortgage payments with interest. The more of your mortgage you pay off, the more equity you secure in the property.

Mortgage contracts include a specified interest rate, payment amount, term and amortization, among other things. The length of time over which you repay a mortgage is called the amortization period. The most common amortization period in Canada is 25 years.

To be eligible to apply for most standard mortgages, you must have:

  • Steady provable income
  • A good credit history and credit score
  • The necessary down payment amount (equity)
  • A reasonable overall debt load

Affording a mortgage

Before starting your mortgage hunt, it is important to calculate the loan amount you will be eligible for. The amount of mortgage you can afford depends on your income, monthly obligations and down payment. Using a Mortgage Affordability Calculator can help you determine this amount.

You can also use a Mortgage Payment Calculator to see what your mortgage payments will look like under different mortgage scenarios. This can help you confirm the type of mortgage that is suitable for your budget.

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High-ratio mortgage vs. low-ratio mortgage

If you have a down payment of less than 20% of the property’s value, your mortgage application will be a high-ratio mortgage. This means over 80% of the property will be mortgaged, with less than 20% equity. High-ratio mortgages require you to have CMHC mortgage loan insurance.

CMHC mortgage default insurance protects your lender in the event you fail to make your scheduled mortgage payments. Mortgage loan insurance premiums are calculated as a percentage of the loan amount and are based on the amount of equity you have.

A home purchased with a 20%+ down payment is known as a low-ratio or "conventional mortgage," which typically involves less risk for the mortgage lender. Other things equal, the more equity you have in your home, the less likely you are to default on the mortgage and the lower the lender’s losses if you do.

CMHC insured mortgage rates are typically lower than uninsured rates. This is because the lender has government-backed default insurance to protect it if you don’t make your payments on time.

Open vs. closed mortgages

Learn the difference between open and closed mortgages.

Closed mortgages

The vast majority of mortgages are closed. A closed mortgage has a prepayment penalty if you try to break your mortgage before the end of the term, or try to pay back more than the allotted amount as per your annual prepayment privileges.

Closed mortgages typically allow you the option of paying extra. For example, most allow up to a 5-20% lump-sum payment annually with no penalty. On top of that, most allow you to make accelerated payments of some kind, like accelerated bi-weekly payments instead of monthly. Each lender sets their own prepayment terms and conditions.

Closed mortgages can have comparatively lower rates that are fixed throughout the term. If you think you will pay off your mortgage before the term ends and you choose a closed fixed mortgage, be prepared to pay a prepayment penalty.

Open mortgages

An open mortgage is flexible, as it allows you to repay up to the total mortgage amount at any time, without a prepayment penalty. Open mortgage rates are always higher than a closed mortgage rate of the same term due to the prepayment flexibility.

Learn more about choosing between an open or closed mortgage.

Frequently asked questions about mortgages

Here are some common mortgage questions you might have as a first-time homebuyer.

Why do banks sell mortgages?

Banks offer mortgages to earn interest on the loan amount. Like most loans, a mortgage involves interest, fees and sometimes penalties, allowing the lender to make a profit.

What is a mortgage rate?

A mortgage rate is the percentage of interest on the loaned amount that you must pay over the term. Mortgage rates can vary widely depending on the length of the mortgage term, whether it is a fixed mortgage rate or a variable mortgage rate, an open or closed mortgage, along with many other factors.

Having a fixed rate mortgage means that your mortgage rate and payment amount will remain the same during the term. A fixed mortgage means no surprises, helping you budget with confidence.

With a variable rate mortgage, the interest rate can change according to the prime lending rate set by your lender. This rate can increase and decrease depending on the Bank of Canada’s rate policy and, to a lesser extent, the lender’s profit motives. If you have a fixed-payment mortgage, should rates fall, your payment stays the same but more of your mortgage payment is applied to your principal, helping you pay off your mortgage faster—and vice versa.

With traditional variable rate mortgages, as prime rate decreases, the payment decreases. As prime rate goes up, the payment goes up. In all cases, your amortization remains the same.

Should you take the first mortgage offer you get?

Never! As a homebuyer, you benefit from competition. You don’t have to stick with the first mortgage offer you get. Instead, you should browse the best mortgage rates and save the most money possible.

How do I look for a mortgage?

Shopping for the optimal mortgage can be an intimidating and seemingly difficult task, but it doesn’t have to be.

On RATESDOTCA, you can easily compare the best mortgage rates in Canada to find one that best serves your financial interests. We’re the only website in the country to display virtually all mainstream lenders that publicly advertise mortgage rates. Our goal is simple: to provide you with Canada’s ultimate one-stop mortgage shopping experience!

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