Mortgage Basics Guide

Everything You Need to Know Before You Buy a Home in Canada

What Is a Mortgage?

A mortgage is a loan used to buy a home. In exchange for the loan, you agree to repay it with interest—and your home serves as collateral. If you don't make your payments, the lender can take possession of the property (this is called foreclosure).

Your Homebuying Budget

Before you shop for homes, you'll need to understand your full budget. It includes:

• Mortgage Amount — What the lender is willing to loan you.
• Down Payment — Your personal contribution (minimum 5% for most homes).
• Closing Costs — Legal fees, appraisal, title insurance, land transfer tax, etc.
• Moving Costs — Movers, furniture, utility setups, and any quick repairs.

Who Provides Mortgages?

• Banks — Offer mortgages to clients who meet strict lending criteria.
• Credit Unions — Often more flexible and community-focused.
• Mortgage Brokers — Work with multiple lenders to find you the best option.

How Do You Calculate Equity?

Home equity is the portion of your home's value that you truly own — it's the difference between what your home is worth and what you still owe on your mortgage.

Mortgage Components

1. Interest Rate

There are three types:

1. Fixed Rate — Stays the same through the term.
2. Variable Rate (VRM) — Interest fluctuates with the bank's Prime Rate, but monthly payments stay the same.
3. Adjustable Rate (ARM) — Interest and payment amounts change with the Prime Rate.

2. Term

This is the length of your mortgage contract (usually 1 to 5 years). At the end of the term, you'll renew at a new rate.

3. Amortization

This is how long it will take to fully repay your mortgage—typically 25 to 30 years. You can shorten this period by making larger or more frequent payments.

Open vs. Closed Mortgages

• Open Mortgages — Can be paid off anytime, but usually come with higher rates.
• Closed Mortgages — Lower rates, but penalties if you break the contract early.

Prepayment Privileges

Most mortgages let you:

• Increase your regular payments by 15% or 20%.
• Make lump-sum payments (usually 10–20% of the original loan annually) without penalty.

Doing this helps pay off your mortgage faster and reduces total interest costs.

Breaking Your Mortgage

If you pay off your mortgage early or refinance before the term ends, you may face a prepayment penalty. This can be:

• 3 months of interest, or
• Interest Rate Differential (IRD) — which may be higher.

Ask your lender or broker how penalties are calculated.

Mortgage Default Insurance (CMHC Insurance)

If your down payment is less than 20%, you must pay for mortgage default insurance. It protects the lender—not you.

• Premium: 2.8%–4.0% of your loan (can be added to your mortgage).
• Required for purchases under $1,500,000.
• Must be repaid in 25 years (or 30 years if you're a First Time Home Buyer)
• Not available for rental or recreational properties.

High-Ratio/Insured Mortgage Insurance

What Is a High-Ratio Mortgage?

If your down payment is less than 20% of the home's price, your mortgage is considered high-ratio or alternatively known as an Insured mortgage. In Canada, this means you're borrowing more than 80% of the property's value—and you're required to get mortgage default insurance. Default Insurance is arranged through the lender.

Why Is Insurance Required?

This insurance protects the lender (not you) in case you stop making mortgage payments. It's a safety net that lets buyers enter the market with as little as 5% down.

Who Offers It?

• CMHC (Canada Mortgage and Housing Corporation)
• Sagen (formerly Genworth Canada)
• Canada Guaranty

💡 Note: The cost is the same regardless of the insurer.

How Much Does It Cost?

➡️ The premium is added to your mortgage, not paid upfront.

How Do You Qualify for High-Ratio Insurance?

You must:

• Buy a home under $1.5 million
• Use it as your primary residence
• Put down at least 5%
• Meet credit and income guidelines

What's Not Covered?

• Homes over $1.5 million
• Rental or investment properties
• Mortgage refinances

Are There Any Benefits?

Yes! High-ratio mortgages often get slightly better interest rates than uninsured ones, since they're backed by an insurer.

Payment Frequency Options

You can choose how often to make payments:

• Monthly
• Bi-weekly
• Accelerated bi-weekly (popular option to pay down faster)
• Weekly
• Accelerated Weekly

Choosing accelerated options helps reduce your interest over time.

Setup Costs to Expect

Here are some one-time costs to plan for:

• Home Appraisal: $500–$650
• Legal Fees: $2,000–$3,000
• Title Insurance: $250–$400
• Home Insurance Binder
• Land Transfer Tax (varies by province, purchase price and location)

These are required in addition to your down payment.

Getting Pre-Approved

A mortgage pre-approval tells you how much you can borrow and shows sellers you're serious. It typically locks in a rate for 90–120 days.

What you need to get Pre-Approved:

• Mortgage Application
• Credit Bureau/Credit Report (we will get this for you)
• Proof of income
• Proof of down payment
• ID and recent bank statements

Final Tip

Your mortgage is more than just a rate.
Look at the full picture—flexibility, penalties, insurance, and advice. A good mortgage setup will save you thousands over time and keep your financial future secure.