Choosing a mortgage that is right for you

What is a mortgage

When you buy a home, you may only be able to pay for part of the purchase price. The amount you pay is a down payment. To cover the remaining costs of the home purchase, you may need help from a lender. The loan you get from a lender to help pay for your home is a mortgage.

A mortgage is a legal contract between you and your lender. It specifies the conditions of your loan and secures it on a property, like a house or a condo.

With a secured loan, the lender has a legal right to take your property. They may do so if you don’t respect the conditions of your mortgage. This includes paying on time and maintaining your home.

Unlike most types of loans, with a mortgage:

• a property secures your loan
• you may have a balance owing at the end of your contract
• you usually need to renew your contract several times until you pay off your balance
• you need a down payment
• you may need to break your contract and pay a penalty
• your loan is typically for an amount in the hundreds of thousands of dollars
• you may need to meet qualification requirements including passing a stress test

Learn how the stress test may impact your qualification.

Mortgage principal

The amount you borrow from a lender for the purchase of a home is the principal amount.

This amount usually includes the:

• purchase price of the home minus your down payment
• mortgage loan insurance if your down payment is less than 20% or if your lender requires it

Learn more about mortgage loan insurance.

Mortgage payments

Mortgage lenders use factors to determine your payment amount.

When you make a mortgage payment, your money goes toward the:

• principal
• interest
• optional mortgage insurance if you purchased this option
• property taxes if you pay them through your lender

Use the Mortgage Calculator to estimate your payment amounts and interest costs.

What to consider when getting a mortgage

Many types of lenders such as banks, credit unions, and other financial institutions offer mortgages. Mortgage brokers also offer mortgages by connecting borrowers with mortgage lenders. Make sure you choose the right lender for your needs.

Learn more about choosing a financial institution.

When you shop for a mortgage, your lender or mortgage broker provides you with options. Make sure you understand the options and features. This will help you choose a mortgage that best suits your needs.

Federally regulated banks must offer and sell you products and services that are appropriate for you. They must consider your circumstances and financial needs. They must also tell you if they’ve assessed that a product or service isn’t appropriate for you.

Take the time to describe your financial situation to make sure you get the right product or service. Don't hesitate to ask questions and make sure you understand the mortgage you have or want.

Term

The mortgage term is the length of time your mortgage contract is in effect. Terms may range from just a few months to 5 years or longer.

At the end of each term, you must renew your mortgage. That’s the case if you can’t pay the remaining balance. You’ll most likely require multiple terms to repay your mortgage.

The length of your mortgage term has an impact on:

• your interest rate and the type of interest you get (fixed or variable)
• the penalties you’ll need to pay if you break your mortgage contract before the end of your term
• how soon you’ll need to renew your mortgage contract

Amortization

The amortization period is the length of time it takes to pay off your mortgage. With a longer amortization period, you spread your payments over a longer period. This means your payments are typically lower. Keep in mind that the longer you take to pay off your mortgage, the more interest you pay.

If your down payment is less than 20% of your home’s price, your maximum amortization period is:

• 30 years if you’re a first-time buyer purchasing a new build
• 25 years in all other cases

If your down payment is more than 20% of your home’s price, your lender sets your maximum amortization period.

Learn more about mortgage terms and amortization.

Interest rate

Lenders use the interest rate to calculate the fees they charge you to borrow money. With a higher interest rate, you pay higher interest fees.

Every time you renew your mortgage term, you renegotiate your mortgage interest rate. This means your mortgage payments may be higher or lower in the future.

When you apply for a mortgage, your lender offers you an interest rate. You may be able to negotiate a lower rate with your lender.

The interest rate your lender offers you may depend on:

• the length of your mortgage term
• the type of interest you choose
• the current posted interest rate offered by your lender
• your credit history
• if you’re self-employed
• if you qualify for a discounted interest rate
• the type of lender you choose like a bank, credit union, financing company or mortgage investment company
• ·the specific lender

Before you commit to a lender, shop around to get the best rate. This could save you thousands of dollars.

Learn more about mortgage interest rates.

Types of interest

When you apply for a mortgage, your lender may offer different interest options.

Fixed interest rate

A fixed interest rate stays the same for the entire term. It’s usually higher than a variable interest rate for a similar term. With a fixed interest rate, your payments stay the same for the entire term.

Variable interest rate

A variable interest rate may increase and decrease during the term. Typically, a variable interest rate is lower than a fixed interest rate for a similar term. With a variable interest rate, you may keep your payments the same for the duration of your term.

Lenders call this a fixed payment with a variable interest rate.

You may also opt for an adjustable payment with a variable rate. With adjustable payments, the amount of your payment will change if the rate changes.

Hybrid or combination interest rate

A hybrid or combination mortgage offers fixed and variable interest rates. Part of your mortgage has a fixed interest rate, and the other has a variable interest rate. The fixed portion offers you partial protection in case interest rates go up. The variable portion provides partial benefits if rates fall.

Each portion may have different terms. This means hybrid mortgages may be harder to transfer to another lender.

Learn more about types of mortgage interest rates.

Payment frequency

Payment frequency refers to how often you make your mortgage payments. You may choose a standard or an accelerated payment schedule. Accelerated payments allow you to make the equivalent of one extra monthly payment each year. This may save you thousands, or tens of thousands of dollars in interest over the life of your mortgage.

You may be able to select from the following payment frequency options:

• monthly—1 payment per month
• semi-monthly—2 payments per month (monthly payment ÷ 2)
• biweekly—1 payment every 2 weeks (monthly payment X 12 ÷ 26)
• weekly—1 payment per week (monthly payment X 12 ÷ 52)
• accelerated biweekly—1 payment every 2 weeks (monthly payment ÷ 2)
• accelerated weekly—1 payment per week (monthly payment ÷ 4)

Learn more about paying off your mortgage faster.

Property taxes

As a homeowner, you need to pay property taxes on your home. The amount you pay depends on the value of your home and where you live.

Some financial institutions collect and pay your property taxes for you. This may also be a condition of financing. If that’s the case, your lender adds the property tax amount to your regular payments.

How your mortgage choices affect your future

Make sure you consider the future impacts of your mortgage choices. This may help you avoid paying a penalty fee in the future.

Mortgage lenders charge a penalty fee when you break your contract. This means, if you sell your home, you could owe the lender thousands of dollars in penalty fees.You could also pay penalty fees if you pay off your mortgage early.

You may need flexibility with your mortgage. This may be the case if you plan on selling your home before you pay your mortgage in full.

Options related to mortgage flexibility include the fact that your mortgage:

• is open or closed
• is portable
• is assumable
• has a standard or collateral security registration

Learn more about mortgage prepayment penalties.

Open and closed mortgages

There are a few differences between open and closed mortgages. The main difference is the flexibility you have in making extra payments or paying off your mortgage.

Open mortgages

Open mortgages typically have higher interest rates than closed mortgage with similar terms. They allow more flexibility if you plan on putting extra money toward your mortgage.

An open mortgage may be a good choice for you if you:

• plan to pay off your mortgage soon
• plan to sell your home soon
• think you may have extra money to put toward your mortgage from time to time

Closed mortgages

Closed mortgages typically have lower interest rates than open mortgages with similar terms. There’s usually a limit on the amount of extra money you may put toward your mortgage each year.

Your lender includes this in your mortgage contract and calls it a prepayment privilege. Not all lenders allow prepayment privileges on closed mortgages. These privileges vary from lender to lender.

A closed mortgage may be a good choice for you if:

• you plan to keep your home for the rest of your mortgage term
• the prepayment privileges provide enough flexibility for the prepayments you expect to make

Learn more about prepayment privileges.

Portable mortgages

If you sell your home to buy another one, a portable mortgage allows you to transfer your existing mortgage. This includes the transfer of your mortgage balance, interest rate and terms and conditions.

You may consider porting your mortgage if:

• your existing mortgage offers favourable features
• you want to avoid prepayment penalties for breaking your mortgage contract early

Check with your lender to see if your mortgage is eligible for porting. Ask about any restrictions that may apply.

If your new home costs less than the amount of your mortgage, you may pay a prepayment penalty. Ask your lender for details if you need to borrow more money for your new home.

Assumable mortgages

An assumable mortgage allows you to take over or assume someone else’s mortgage and their property. It also allows someone else to take over your mortgage and your property. The terms of the original mortgage must stay the same.

You may consider an assumable mortgage if:

• you’re a buyer and interest rates have gone up since you got your mortgage
• you’re a seller and you:
  • want to move to a less expensive home and
  • want to avoid prepayment fees because you have several years left on your existing term

The assumable option is typically available on most fixed-rate mortgages. It’s not available with variable-rate mortgages and home equity lines of credit.

The lender must approve the buyer who wants to assume the mortgage. If the lender approves, the buyer takes over the remaining mortgage payments to the lender. The buyer is also responsible for the terms and conditions set out in the mortgage contract.

In some provinces, the seller may remain personally liable for the assumable mortgage after the sale of the property. If the buyer doesn’t make their mortgage payments, the lender may ask the seller to make the payments.

Some lenders may release the seller from the responsibility if they approve the buyer for the mortgage.

Check with your lender to see if your mortgage is assumable. Lenders may charge you a fee to assume a mortgage. Your mortgage contract indicates if you need to pay a fee to complete the transfer.

Standard and collateral charges

A mortgage is a loan secured by property, like a home. When you take out a mortgage, the lender registers a charge on your property. The type of charge determines which loans your lender allows you to secure against your property.

Standard charge

A standard charge only secures the mortgage. It doesn’t secure any other loans you may have with your lender, like a line of credit. The lender registers the charge for the amount of your mortgage.

Collateral charge

With a collateral charge mortgage, you may secure multiple loans with your lender. This includes a mortgage and a line of credit.

The lender may register a charge higher than the amount of your mortgage. This allows you to borrow additional funds on top of your original mortgage in the future.

You avoid paying fees to discharge your mortgage and register a new one. You only need to make payments, including interest, on the money you borrow.

Optional mortgage features

Many lenders offer optional features.

Cash back

Cash back is an optional feature on some mortgages. It allows you to immediately receive a portion of your mortgage amount in cash. It may help you pay for things you need when you buy a home, such as legal fees.

Usually, if you use the cash back feature, your interest rate is higher. The amount of interest you’ll pay may end up costing you more money than you get as cash back.

Your lender may put limits on the cash back feature. For example, you may not be able to use cash back funds as part of your down payment.

Your lender may ask you to repay some or all the cash back amount. This typically happens if you decide to break your mortgage contract before the end of the term.

Home equity lines of credit

A Home equity line of credit (HELOC) is a secured form of credit. The lender uses your home as a guarantee that you’ll pay back the money you borrow.

Most major financial institutions offer a HELOC combined with a mortgage under their own brand name. It’s also sometimes called a readvanceable mortgage.

A HELOC is a revolving credit. You may borrow money, pay it back, and borrow it again, up to a maximum credit limit.

Find out more about HELOCS.

Title insurance

Your lender may require you to get title insurance as part of your mortgage contract. The title on a home is a legal term used to define who owns the land.

When you buy a home, the title is discharged from the previous owner. It is transferred to you and your lender.

Learn more about mortgage titles and discharges.

Title insurance protects you and your lender against losses related to the property’s title or ownership. For example, title insurance protects you from title fraud.

Title fraud happens when a fraudster steals the title of your home and:

• sells the home
• applies for a new mortgage on this home

There are 2 types of title insurance:

• lender title insurance: protects you until you pay the mortgage in full
• homeowner title insurance: protects you as long as you own the home, even if you don’t have a mortgage

When you get title insurance, you pay a one-time fee, based on the value of your home. The one-time fee is a premium. Premiums generally cost between $150 and $350 but could cost more.

If you don’t buy title insurance right away, you may buy it later.

Title insurance is available from:

• lawyers (or notaries in Quebec and British Columbia)
• title insurance companies
• insurance agents
• mortgage brokers

Learn more about real estate fraud.

Optional mortgage insurance

Optional mortgage insurance products include life, illness and disability insurance. These optional products are different from mortgage loan insurance.

They may help you make your mortgage payments, or help pay off the balance on your mortgage if you:

• lose your job
• get injured
• become disabled
• become critically ill
• die

Your lender might offer you optional mortgage insurance when you consent to a mortgage. You don’t need to purchase the insurance for your lender to approve your mortgage. The lender adds the cost of these optional products to your mortgage payment.

The coverage that optional mortgage insurance products provide has important limits. Read your insurance policy carefully. Ask questions about anything you don’t understand before purchasing this product.

Find out more about optional mortgage insurance products.

Related links

• Buying a home​
• How much you need for a down payment
• Preparing to get a mortgage
• Renewing your mortgage