Mortgage Basics Every Canadian Buyer Should Know

Down payment, insurance, and the amortization

In Canada, your down payment size determines whether you need mortgage default insurance. Putting down less than 20% of the purchase price makes you a high-ratio buyer, and your lender will require insurance through a provider like CMHC to protect the lender if you default. That insurance premium gets added to your mortgage balance, so a smaller down payment means a bigger loan and more interest paid over time.

There's also a minimum down payment rule tied to home price, with the required percentage stepping up on more expensive homes. Because these thresholds and the exact rules change periodically, confirm the current minimums and insurance premium schedule with CMHC before you budget.

Amortization is the total length of time it would take to pay off the mortgage in full, commonly stretched over a couple of decades or more. Your amortization period is separate from your term, and a longer amortization lowers your monthly payment but increases the total interest you pay over the life of the loan.

• A down payment under 20% requires mortgage default insurance and pushes up your loan balance. - A down payment of 20% or more is a conventional mortgage with no insurance requirement. - Longer amortization = smaller payments now, more interest paid overall.

Rate types: fixed, variable, and term length

A fixed-rate mortgage locks your interest rate for the entire term, so your payment amount doesn't change even if market rates move. This gives you predictability, which is valuable if you're budgeting tightly or don't want to think about rate swings.

A variable-rate mortgage moves with your lender's prime rate, which follows the Bank of Canada's policy rate. Some variable mortgages keep your payment fixed and adjust how much goes to principal versus interest, while others let the payment itself rise and fall with rate changes—know which type you're signing up for.

Your term is the length of the contract you sign with a lender, typically ranging from six months to ten years, with five years being the most common. At the end of the term, you renew, either with the same lender or a new one, and that renewal is a fresh negotiation, not an automatic continuation of your old rate.

Neither fixed nor variable is objectively better; it depends on your risk tolerance, how long you plan to stay in the home, and where you think rates are headed. If you're unsure, this is a case where talking through the tradeoffs with a mortgage professional matters more than picking based on today's headlines.

The stress test and how much you'll actually qualify for

Federally regulated lenders in Canada are required to qualify you at a stress test rate that's higher than your actual contract rate. This means the bank checks whether you could still afford payments if rates were meaningfully higher than what you're being offered, which caps how much you can borrow relative to your income.

The stress test exists because it protects both you and the financial system from borrowers taking on mortgages they can only afford under today's low-rate conditions. It's applied whether you're putting down 5% or 50%, and it applies at renewal too if you switch lenders.

Lenders also look at two debt ratios: how much of your income goes to housing costs alone, and how much goes to housing plus all other debt payments combined. Carrying a car loan or high credit card balances can shrink your mortgage approval even if your income looks strong on paper.

Because stress test rates and qualifying formulas are set by federal regulators and can change, don't rely on a number you heard from a friend or an old article—get a current pre-approval from a lender or broker before you start house hunting.

Closing costs, prepayment privileges, and renewal

The mortgage itself is only part of the cash you need on closing day. Land transfer tax (which varies by province and sometimes by municipality), legal fees, a home inspection, and title insurance can add up to several thousand dollars beyond your down payment, so budget for them separately.

Most mortgages include prepayment privileges that let you pay down extra principal each year, often up to a set percentage of the original balance, without penalty. Using these privileges when you can is one of the simplest ways to cut years off your amortization and save on total interest.

Breaking a mortgage before your term ends—whether to refinance, sell, or switch lenders—usually triggers a penalty, and for fixed-rate mortgages that penalty can be substantial. Read the penalty clause in your contract before you sign, not after you need to break it.

Renewal is a decision point, not a formality. Shopping your renewal with other lenders, or at least asking your current lender to match a competitive rate, is worth the hour it takes and can meaningfully change what you pay over the next term.

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