A mortgage is a loan used to buy real estate. When you take out a mortgage, a lender — usually a bank, credit union, or mortgage company — gives you money to buy a home, and you agree to repay that money over time with interest. The home itself serves as collateral, meaning if you stop making payments, the lender has the right to take the property.
For most Canadians, a mortgage is the largest financial commitment they will ever make. Understanding how it works before you sign is essential.
The principal is the amount of money you actually borrowed — the purchase price of the home minus your down payment. If you buy a $600,000 home and put $60,000 down (10%), your principal is $540,000.
The down payment is the portion of the purchase price you pay upfront from your own money. In Canada, the minimum down payment is:
If your down payment is less than 20%, you must purchase mortgage default insurance (also called CMHC insurance) — more on this below.
This is how long it takes to pay off the entire mortgage if you make every scheduled payment. In Canada, the maximum amortization for insured mortgages (down payment under 20%) is 25 years as of 2025, recently extended to 30 years for first-time buyers purchasing new builds. For conventional mortgages (20%+ down), lenders typically allow up to 30 years.
A longer amortization means lower monthly payments but much more total interest paid. A 25-year amortization on a $500,000 mortgage at 5% costs significantly less in total interest than a 30-year amortization at the same rate.
The term is how long your current mortgage contract lasts — NOT the full amortization. Most Canadians choose a 5-year fixed term. At the end of your term, you renew (renegotiate the rate for another term) until the mortgage is fully paid off. Terms in Canada range from 6 months to 10 years.
The rate charged on your mortgage, expressed annually. Canadian mortgage interest compounds semi-annually by law. In 2025, 5-year fixed rates are roughly 4%–5.5% depending on lender and your credit profile.
If your down payment is less than 20%, you are required to purchase mortgage default insurance through CMHC (Canada Mortgage and Housing Corporation), Sagen, or Canada Guaranty. This insurance protects the lender — not you — if you default.
The insurance premium is added to your mortgage and ranges from 2.8% to 4% of the mortgage amount depending on your down payment size:
On a $500,000 mortgage with 5% down ($25,000), the CMHC premium is $19,000 — added to your mortgage, so you're now borrowing $519,000. You also pay PST on the CMHC premium in some provinces (Ontario, Manitoba, Quebec, Saskatchewan) at the time of closing.
Your monthly payment covers two things: principal repayment and interest. Early in your mortgage, most of each payment goes toward interest. Over time, more goes toward principal. This is called amortization.
Example: $500,000 mortgage at 5%, 25-year amortization:
Breaking a mortgage before the term ends — to sell, refinance, or switch lenders — triggers a penalty. For fixed-rate mortgages, this is usually the greater of:
Big bank mortgage penalties for fixed rates are often $100–$30,000 or more, calculated using posted rates rather than actual rates. Monoline lenders (Meridian, First National, MCAP) typically use simpler, fairer penalty calculations. This is a significant reason why using a mortgage broker and understanding penalty calculations before choosing a lender matters.
To qualify for a mortgage in Canada, you must pass the federal mortgage stress test. This means you must prove you can afford payments at a rate of 5.25% OR your actual contract rate plus 2% — whichever is higher.
If your actual mortgage rate is 4.5%, you are tested at 6.5%. This is to ensure you can still afford your mortgage if rates rise after you sign. The stress test has reduced the maximum mortgage amount most Canadians qualify for compared to pre-2018.
A mortgage pre-approval tells you how much a lender is willing to lend you, at what rate, for how long. Getting pre-approved before house hunting is essential in Canada's competitive real estate markets. It:
Pre-approval is not a guarantee of final approval. The lender still reviews the specific property and your financial situation before advancing funds.
You can get a mortgage directly from a bank or through a mortgage broker. Brokers work with dozens of lenders (banks, credit unions, monoline lenders) and can often find better rates or terms than you'd get going directly to one bank. Brokers are paid by the lender, not you, in most cases. Getting at least one broker quote alongside your own bank quote is standard practice for informed Canadian homebuyers.
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