Welcome to the world of mortgages—where big numbers, interest rates, and fine print reign supreme. But don't worry, we've got you covered. Whether you're a first-time buyer or just want to brush up on the details, this guide will help you understand everything you need to know about mortgages in Canada.
Let's start with the basics.
What is even a mortgage?
A mortgage is a loan that helps you buy a home. Instead of paying the full price upfront (because let's be real, who has that kind of cash?), a lender—usually a bank, financial service provider, or credit union—covers most of the cost, and you pay them back over time.
In exchange, the lender charges interest on the amount you borrow. And if you stop making payments? The lender can take the home back (a.k.a. foreclosure). So, yeah, it's pretty important to keep up with those payments.
Types of Mortgages: What's the right one for you?
There's no one-size-fits-all mortgage. The right type depends on how long you plan to stay in your home, your risk tolerance, and how much flexibility you need.
1. Fixed-Rate vs. Variable-Rate vs. Adjustable-Rate Mortgages
Fixed-Rate Mortgage: Your interest rate stays the same for the entire term. Great if you want predictability.
Variable-Rate Mortgage: Your rate can go up or down based on the market. Riskier, but you might save money if rates drop.
Adjustable-Rate Mortgage (ARM): The most flexible option. Like a variable-rate mortgage, your interest rate fluctuates with the market. However, unlike a variable mortgage where only the interest portion changes, an ARM adjusts your entire payment amount. If rates drop, you immediately pay less. If rates rise, your payment increases, but you continue paying down your principal at the same rate, helping you build equity faster.
Which one's better? If you don't like surprises, go fixed. If you're comfortable with some risk, variable might be the way to go. If you want instant savings when rates drop and faster equity-building, adjustable could be the winning choice. Neo Mortgage offers competitive fixed and adjustable rates to customers.
2. Open vs. Closed Mortgages
Open Mortgage: You can pay it off anytime without penalties. But... interest rates are higher.
Closed Mortgage: Lower rates, but penalties may apply if you try to pay it off too fast.
Which one's better? If you think you'll come into some extra cash and are eager to pay off your mortgage quickly, open could work. Otherwise, most people go with closed for the better rate.
3. High-Ratio vs. Conventional Mortgages
High-Ratio Mortgage: When you put less than 20% down, you'll need mortgage insurance (more on that later). This allows you to purchase with a lower down payment, which may lower interest rates due to insured risk.
Conventional Mortgage: You put 20% or more down, so mortgage default insurance is not required.
What does the process look like? From Pre-Qualified to Move-In Day
Step 1: Explore Lenders
Not all lenders offer the same rates or terms. You can get a mortgage from:
- Big Banks – Popular and established, but not always the best rates.
- Financial Service Providers (Monoline Lenders) – Mortgage specialists with competitive rates and select financial services.
- Credit Unions – Flexible lending rules and sometimes lower rates.
- Mortgage Brokers – They shop around to find you the best deal.
Step 2: Get Pre-Qualified
Before you start house hunting, you should get pre-qualified for a mortgage. This means a lender reviews your high-level financial situation and gives you a ballpark amount of how much they'd lend you and with what interest rates.
Pro-tip: Just because you qualify for a higher amount doesn't mean you should borrow the maximum. A bigger loan can lead to higher monthly payments, increased interest costs, and less financial flexibility. Consider what you can comfortably afford while leaving room for savings, unexpected expenses, and future financial goals.
Why it's important: It shows sellers and realtors you're serious and helps you stay within budget.
What lenders look at:
- Credit score (higher is better, but you can still get approved with a lower score)
- Income and employment stability
- Debt-to-income ratio (how much debt you have vs. your income)
Step 3: Make an Offer & Finalize Your Mortgage
Once you find a home and your offer has been conditionally accepted, your mortgage lender will finalize your loan, and you'll sign a mortgage agreement. This will outline your:
- Interest rate
- Loan amount
- Payment schedule
- Maturity date
- Prepayment terms
While your loan agreement is being finalized, take time to do your due diligence. A home inspection helps protect you from costly hidden repairs—an essential step in what might be one of your biggest financial investments.
Navigating the home-buying process can be overwhelming, but having the right support makes all the difference. Realtors® and real estate platforms, like Wahi, not only help you find the perfect home—they can help connect you with trusted professionals like lawyers and inspectors, making the entire journey smoother, faster, and stress-free. With the right team, you're never in this alone.
Down Payments & Mortgage Insurance
How Much Do You Need for a Down Payment?
- 5% for homes under $500K
- 10% for homes between $500K & $1.5M
- 20%+ for homes over $1.5M
- 20%+ if you also want to avoid mortgage default insurance
What is Mortgage Default Insurance?
If you put down less than 20%, you'll need mortgage default insurance from CMHC, Sagen, or Canada Guaranty, which gets added to the principal amount. This protects the lender in case you default.
How much does it cost? Between 2.8%–4% of your loan amount, added to your mortgage.
First-Time Home Buyer Perks (a.k.a. Free Money & Tax Breaks)
If this is your first home, Canada offers some sweet deals:
- Home Buyers' Plan (HBP) → Withdraw up to $35K from your RRSP or FHSA tax-free to use as a down payment (up to $60K for couples). Please note, this amount does need to be paid back within 15 years.
- Land Transfer Tax Rebates → Some provinces and cities offer rebates on land transfer taxes, helping cut down closing costs.
- First-Time Home Buyers' Tax Credit (HBTC) → Claim up to $10,000 in tax credits ($1,500 in tax savings) to help with home-buying expenses.
- GST/HST New Housing Rebate → If you're buying a newly built home, you may be eligible for a rebate on the GST/HST you paid.
Mortgage Payments & Hidden Costs
When budgeting for homeownership, it's important to distinguish between your mortgage payment and the hidden costs that come with it.
Your Mortgage Payment (What You Pay to Your Lender)
- Principal – The amount you borrowed, plus any potential mortgage default insurance.
- Interest – What the lender charges you for the loan.
- Property Taxes – May be included in your mortgage payment or paid separately.
Hidden Costs of Homeownership (Beyond Your Mortgage Payment)
- Home Insurance – Required by lenders to protect your home.
- Condo Fees & Reviews - Regular fees for upkeep, plus occasional special assessments
- Maintenance & Repairs – Because roofs don't fix themselves.
- Utilities – Electricity, water, heating, and more.
- Legal Fees – Lawyer or notary costs during home purchase.
- Inspection Fees - The cost of a professional home inspection before buying
Mortgage Renewal & Refinancing
What Happens When Your Mortgage Term Ends?
Your amortization is the total lifespan of your loan, but along the way, shorter renewal periods give you the chance to reassess your rate, switch lenders, or accelerate your payments.
- Renew with your current lender – They'll offer you a new rate (but it might not be the best deal).
- Switch lenders – Shop around for better rates before renewing.
- Pay off your mortgage - You can choose to pay off the remainder of your mortgage without a penalty.
Refinancing: What is it and is It Worth It?
Refinancing means replacing your existing mortgage with a new one—either to get a lower interest rate, access equity from your home, or change your mortgage terms. It's like hitting the reset button on your loan, but with new terms that (hopefully) work better for you.
Why refinance? It can help:
- Lower your interest rate.
- Free up cash for renovations, which can help improve the value of the home.
- Consolidate debt into your mortgage, which can simplify your finances, and open up monthly cashflow.
How to Pay Off Your Mortgage Faster (and Save Thousands!)
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Switch to Bi-Weekly Payments – Instead of 12 monthly payments, make 26 smaller, bi-weekly payments. This adds up to one extra full payment per year, shaving years off your loan.
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Go for Bi-Weekly Accelerated Payments – Similar to bi-weekly payments, but with slightly higher amounts, helping you pay off your mortgage even faster.
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Make Lump-Sum Payments – If your lender allows prepayments, up to a certain percentage, put extra cash toward your principal whenever possible—bonuses, tax refunds, or even small windfalls can make a big impact.
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Choose or Refinance to a Shorter Amortization – Choosing a 20-year mortgage instead of a 25-year one means higher payments but significantly less interest over time.
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Increase Your Regular Payment Amount – Many lenders allow you to boost your payment between 10%-15% but some may even allow up to 20%, like Neo Mortgage. Even a small increase can help you chip away at your mortgage faster.
A mortgage is a big commitment, but understanding the basics can make the process way less intimidating. The key is knowing your options, shopping around, and taking advantage of first-time buyer programs (if you are one!).
Your dream home? It's now closer than you think!
