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Mortgage 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 can’t pay the whole amount in cash. You will need to apply for a loan. 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 pay 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 Loan insurance protects your lender in case you fail to pay them back. 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 purchase with a 20% or more down payment is known as a low-ratio mortgage, which implies a lower 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 Mortgage Loan 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 differences between and open and closed mortgages.

Closed mortgages

The vast majority of mortgages are closed. A closed mortgage has a prepayment penalty if you try to pay a bigger amount than the allotted annual prepayment privilege before the mortgage term ends.

Closed mortgages typically allow you the option of paying extra. For example, most allow up to a 5-25% lump-sum prepayment privilege 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 when you do so.

Open mortgages

An open mortgage is flexible, as it allows you to repay the total mortgage amount any time, without a prepayment penalty. Most open mortgage rates are variable. They are always higher than a closed mortgage rate of the same term. For some people, however, higher open mortgage rates are a small price to pay for 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 principal amount. Like most loans, a mortgage paid off with additional interest, fees and sometimes penalties, allowing the lender to make a profit.

What is a mortgage rate?

A mortgage rate is the percentage rate of interest you pay on a mortgage loan. Mortgage rates can greatly 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, etc.

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 will change with 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. When prime rate decreases, the 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.

There are also adjustable-rate mortgages. In this case, 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 and see which one best serves your financial interest. We’re the only website in the country to display virtually all mainstream lenders that publicly advertise mortgage rates. The goal is simple: to provide you Canada’s ultimate one-stop mortgage shopping experience!

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