Choosing a mortgage that is right for you

From Financial Consumer Agency of Canada

A mortgage is a loan to help you buy a home or other property.

Mortgages have different features to meet different needs. Make sure you understand the options and features lenders offer you when you shop for a mortgage. This will help you choose a mortgage that best suits your needs.

Open and closed mortgages

The main difference between open and closed mortgages is the amount of flexibility you have in making extra payments or paying off your mortgage completely.

Putting extra money toward your mortgage is called a prepayment. Prepayments allow you to pay down your mortgage faster.

Open mortgages

The interest rate is usually higher than on a closed mortgage with a comparable term length. This is because it allows more flexibility if you think you may extra money toward your mortgage on top of your regular payments.

Open term mortgages allow you to do the following at any time during your term without paying a penalty:

  • put extra money toward your mortgage on top of your regular payments at any time
  • pay off your mortgage completely before the end of the term
  • renegotiate your mortgage before the end of your term
  • break your contract to change lenders before the end of your term

An open mortgage may be a good choice if you:

  • plan to pay off your mortgage soon
  • plan to move in the near future
  • think you may have extra money to put toward your mortgage from time to time, such as if you get a lump-sum bonus

Closed mortgages

The interest rate on a closed mortgage is usually lower than on an open mortgage with a comparable term length.

Closed term mortgages usually limit the amount of extra money you can put toward your mortgage each year on top of your regular payment without paying a penalty. Your mortgage contract includes a limit to the amount of extra money you may put toward your mortgage. Your lender calls this a prepayment privilege. Not all closed mortgages allow prepayment privileges. They vary from lender to lender.

You may have to pay a penalty if you break your mortgage contract, or change lenders.

You’ll generally be required to pay a prepayment penalty if:

  • you make a prepayment that is more than what your lender allows
  • you decide to break your mortgage contract

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

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

Find out how prepayment penalties are calculated.

When shopping around for a mortgage, ask potential lenders about these options. Make sure to understand all the terms and conditions of your mortgage contract.

Choose an amortization period

The amortization period is the length of time it takes to pay off a mortgage in full. The longer the amortization period, the lower your payments will be. Keep in mind that the longer you take to pay off your mortgage, the more you'll pay in interest.

If your down payment is less than 20% of the purchase price of your home, the longest amortization you’re allowed is 25 years.

Table 1: How amortization affects the amount of principle paid back and interest paid after five years
Mortgage amount Amortization Monthly payment Total interest paid
(Assume a constant interest rate of 4%)
Amount of principal paid back after five years
(Assume a constant interest rate of 4%)
Percentage of your mortgage paid back after five years
(Assume a constant interest rate of 4%)
$300,000 25 years $1,578 $173,418 $38,838 12%
$300,000 20 years $1,813 $135,057 $54,384 18%
$300,000 15 years $2,214 $98,541 $80,973 27%
$300,000 10 years $3,033 $63,919 $135,196 45%

Choose a term

The mortgage term is the length of time your mortgage contract will be in effect. This includes everything your mortgage contract outlines, including the interest rate. Terms can range from just a few months to five years or longer.

At the end of each term, you’ll need to renew your mortgage. You'll most likely require multiple terms to repay your mortgage in full. If you’re able to pay off your mortgage in full at the end of your term, you don’t need to renew your mortgage.

If you want to renegotiate your mortgage contract or pay off your mortgage before the end of the term, you may have to pay a prepayment penalty. The amount you’ll pay will depend on the type of mortgage you have and the terms and conditions of your mortgage contract.

When choosing the length of your term, you may want to consider:

  • if you plan on moving
  • if you want to have the same payment for a longer period of time

Short-term mortgage

If you choose a short-term mortgage, you won’t have to wait as long if you want to renegotiate your mortgage for a lower interest rate or change lenders without paying any fees.

This may be a good choice if you expect interest rates to go down or if you may need to change your mortgage within the next couple of years. For example, if you think you’ll be moving to a new home.

However, if interest rates go up, you may need to renegotiate your mortgage at a higher interest rate.

Long-term mortgage

If you choose a longer-term mortgage, you can lock in an interest rate for a longer period of time.

This may help you with budgeting, since you’ll know for certain what your housing costs will be for a longer period of time. However, you may not be able to make any changes to your mortgage contract for several years without having to pay a prepayment penalty.

For terms longer than five years, you may pay a lower prepayment penalty after five years have passed. After five years, you’ll only be charged three months’ interest on the remaining mortgage balance if you want to make changes to your mortgage contract.

Convertible term

A convertible mortgage means that some short-term mortgages can be extended to a longer term. Once the mortgage is converted or extended, the interest rate will change to the rate the lender is offering for the longer term.

Decide on fixed or variable interest rates

Interest is the amount of money you'll pay to a lender for borrowing money. When you apply for a mortgage, your lender may offer different options to calculate the interest you'll pay on your loan.

Fixed interest rate mortgage

Fixed interest rates will stay the same for the entire term. Fixed interest rates are usually higher than variable interest rates.

A fixed interest rate mortgage may be better for you if you want to:

  • keep your payments the same over the term of your mortgage
  • know in advance how much of your mortgage (principal) will be paid off by the end of your term
  • keep your interest rate the same because you think there is a good chance that market interest rates will go up over the term of your mortgage

Variable interest rate mortgage

A variable interest rate can increase and decrease during the term. If you choose a variable interest rate, you may be offered a lower interest rate than the one you'd get if you selected a fixed interest rate.

Keep in mind that the rise and fall of interest rates are difficult to predict. Consider how much of an increase in mortgage payments you'd be able to afford if interest rates rise. Note that between 2005 and 2015, interest rates varied from 0.5% to 4.75%.

Get information on current interest rates from the Bank of Canada or your lender’s website.

Fixed payments with a variable interest rate

If the interest rate goes up, more of your payment will apply to interest, and less to the principal.

If the interest rate goes down, more of your payment will apply to the principal. You'll pay off your mortgage faster.

If the market interest rates increase to a certain percentage or trigger point, your lender may increase your payments. This payment increase will make sure that you pay off your mortgage in the timeframe, that is, amortization period, you originally agreed upon with your lender. Your mortgage contract lists the trigger point.

Adjustable payments with a variable interest rate

With adjustable payments, the amount of your payment will change if the interest rate changes. A set amount of each payment will apply to the principal. The interest portion will change as the interest rates change. You'll know in advance how much of the principal will be paid at the end of the term.

If the interest rate rises, your payments will increase. Make sure that you'll be able to adjust your budget in case your payments increase.

If the interest rate goes down, your payments will decrease.

What you can do to protect yourself if interest rates rise

Ask your lender if it offers:

  • an interest rate cap: a maximum interest rate your lender can charge on a mortgage. You'll never have to pay more in interest than the maximum cap, even if the interest rates rise
  • a convertibility feature: where, at any time during your term, you can convert or change your mortgage to a fixed interest rate

Note that if you choose a convertibility feature and change your mortgage to a fixed interest rate:

  • you'll usually have to pay a fee
  • certain conditions may apply
  • your new fixed interest rate may be higher than the variable interest rate you've been paying

Example: Choosing between variable and fixed interest rates

Suppose you're buying a home and need a mortgage for $200,000.

You're looking for a mortgage with the following:

  • a 25-year amortization period
  • a five-year term

Your lender offers you the following interest rates:

  • 3.5% for a variable interest rate, with adjustable payments, or
  • 4.0% for a fixed interest rate

To decide which interest rate you'll choose, consider the different scenarios in Table 2.

Table 2: Compare variable and fixed interest rates
Scenario 1:
  • fixed interest rate mortgage
  • interest rate not affected by changes in market interest rates
Scenario 2:
  • variable interest rate mortgage
  • increases by 2% during five-year term
Scenario 3:
  • variable interest rate mortgage
  • interest rate increases by 4% during five-year term
Scenario 4:
  • variable interest rate mortgage
  • interest rate stays the same during five-year term
Interest rate Monthly payment Interest rate Monthly payment Interest rate Monthly payment Interest rate Monthly payment
Year 1: 4.0% $1,052 3.5% $  999  3.5% $  999  3.5% $999
Year 2: 4.0% $1,052 4.0% $1,050 4.5% $1,103 3.5% $999
Year 3: 4.0% $1,052 4.5% $1,101 5.5% $1,209 3.5% $999
Year 4: 4.0% $1,052 5.0% $1,152 6.5% $1,316 3.5% $999
Year 5: 4.0% $1,052 5.5% $1,202 7.5% $1,423 3.5% $999
Total payment over five-year term $63,122 $66,044 $72,607 $59,912
Interest paid over five-year term (part of total payment) $37,230 $41,620 $50,830 $32,472
Amount left on your mortgage after five years $174,108  $175,576 $178,223 $172,560

Over the life of the five-year term:

  • Scenario 1: your payments would remain the same at $1,052
  • Scenario 2: your payments would increase by $203 (from $999 to $1,202)
  • Scenario 3: your payments would increase by $424 (from $999 to $1,423)
  • Scenario 4: your payments would remain the same at $999

Consider if you're comfortable with the possibility of interest rates increasing. Decide if your budget could handle higher payments. If not, a fixed rate mortgage may be better for you.

A variable interest rate mortgage may be better for you if you're comfortable with:

  • your interest rate changing and you think there is a good chance interest rates may drop or stay the same
  • your mortgage payments potentially changing
  • the need to follow interest rates closely if your mortgage has a convertibility option

Hybrid or combination mortgages

You could also choose a hybrid or combination mortgage. In these mortgages, part of your mortgage has a fixed interest rate and the other part of your mortgage has a variable interest rate.

The fixed portion gives 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.

Decide how often you'll make payments

When you make a mortgage payment, the money is split between interest and principal. Money is first put toward the interest, and then toward the principal. The principal is the amount you borrowed from the lender.

When you first get a mortgage, most of your payments will go toward interest. The amount that you owe will only go down a little. As your mortgage balance decreases, more of your payment will go to the principal.

Payment frequency

Payment frequency refers to how often you make your mortgage payments. Your payment frequency is set when you and your lender first arrange your mortgage, but you may be able to change it.

Monthly

  • One payment per month for a total of 12 per year

Semi-monthly (twice a month)

  • Two payments per month for a total of 24 payments per year
  • Take your monthly payment and divide it by two (monthly payment ÷ 2)
  • The total amount you pay over the year is the same as with the monthly payment option

Biweekly (every two weeks)

  • One payment every two weeks, for a total of 26 payments per year
  • Take your monthly payment, multiply it by 12 and then divide by 26 (monthly payment x 12 ÷ 26)
  • The total amount you pay over the year is the same as with the monthly payment option

Weekly

  • One payment per week, for a total of 52 payments per year
  • Take your monthly payment, multiply it by 12 and then divide by 52 (monthly payment x 12 ÷ 52)
  • The total amount you pay over the year is the same as with the monthly payment option

Accelerated payment options

Accelerated weekly and biweekly payments will help you pay off your mortgage faster. Accelerated options allow you to make the equivalent of one extra monthly payment each year. This can save you thousands, or even ten thousands of dollars in interest charges over the life of your mortgage.

Accelerated biweekly

  • A payment of half the monthly payment every two weeks.
  • Take your monthly payment and divide it by two
  • With this payment frequency, you’ll make the equivalent of one extra monthly payment per year

Accelerated weekly

  • A payment of a quarter of the monthly payment every week.
  • Take your monthly payment and divide it by 4
  • With this payment frequency, you’ll make the equivalent of one extra monthly payment per year

Example: Determining how often you'll make payments

Suppose you have a $260,000 mortgage that you’ll pay off over 25 years. You have a 4% interest rate for the entire amortization period.

To decide which payment frequency you’ll choose, consider the different scenarios in Table 3.

Table 3: Impact of changing the payment frequency
Payment frequency Number of payments
per year
Payment amount Total payments
per year
Interest saved on mortgage
Monthly 12 $1,400 $16,800 $0
Semi-monthly 24 $700
($1,4000 ÷ 2)
$16,800 $197
Biweekly 26 $646
($1,400 x 12 ÷ 26)
$16,800 $212
Accelerated Biweekly 26 $700
($1,40  ÷ 2)
$18,200 $21,273
Weekly 52 $323
($1,400 x 12 ÷ 52)
$16,800 $305
Accelerated weekly 52 $350
($1,400 ÷ 4)
$18,200 $21,509

If you choose an accelerated payment frequency, you’ll make the equivalent of one extra payment each year. You’ll also pay off your mortgage more than four years sooner. You’ll save over $21,000 in interest over the amortization period.

Mortgage security registration: standard vs. collateral charges

A charge allows your lender to sell your property if you don't repay the mortgage as agreed. The lender will sell your property to recover the money you owe.

Once you pay off your property, your mortgage charge is removed or discharged. There may be costs associated with discharging your mortgage. Ask your lender about the steps to discharge your property.

The type of charge used by a lender varies. Different types of charges may be associated with different types of mortgage products. Before you make a final decision on your mortgage, ask the lender how your charge will be registered.

Standard charge

A standard charge only secures the mortgage loan that is detailed in the document. It doesn't secure any other loans you may have with your lender, such as a line of credit. The charge is registered for the actual amount of your mortgage.

If you want to borrow more money in the future, you may be able to use your home to secure the new loan. You'll need to apply and re-qualify for additional money and register a new charge. There may be costs, such as legal, administrative, discharge and registration costs.

If you want to switch your mortgage loan to a different lender at the end of your term, you may be able to do so by assigning your mortgage to a new lender. Talk to your lender for full details.

Collateral charge

A collateral charge can be used to secure multiple loans with your lender, including a mortgage and a line of credit.

The charge can be registered for an amount that is higher than your actual mortgage loan. This allows you to potentially borrow additional funds on top of your original mortgage loan in the future without having to pay fees to discharge your mortgage and register a new one. You only have to make payments, including interest, on the money you actually borrow.

A new charge will only be required if you want to borrow more than the amount that is registered on the original charge. You'll still need to apply for additional money and re-qualify.

Changing lenders when you have a collateral charge

A collateral charge may make it more difficult to switch lenders at the end of your term. Some lenders may not accept the transfer of your collateral charge mortgage.

To change lenders you'll need to discharge your mortgage. You'll need to repay, or transfer to the new lender, all loans you've secured with a collateral charge. This may include car loans or lines of credit. You may also have to pay fees such as legal, administrative, discharge and registration costs. Check with your lender for details and if any discounts are available to you.

Portable and assumable mortgages

If you plan on selling your home or moving, you may consider portable and assumable mortgages.

Portable mortgage

If you're selling your home to buy another home, a portable mortgage allows you to transfer your existing mortgage to a new property and remain with the same lender. This includes the transfer of your mortgage balance, interest rates and terms and conditions.

You may want to consider porting your mortgage, if:

  • you have favourable terms on your existing mortgage
  • 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 might apply.

Porting your mortgage to a home that costs less

If your new home will cost less than the amount you owe on your mortgage, you may be required to pay a prepayment penalty.

Find out how prepayment penalties are calculated.

Porting your mortgage to a home that costs more

If you need to borrow more money for your new home ask your lender for details.

If your lender agrees to lend you more money:

  • your final interest rate may be blended into a combination of your old interest rate and the new interest rate
  • your lender may charge you the current interest rate on the additional money you borrow
  • you may have to pay for an additional amount of mortgage loan insurance

Some lenders limit the time between the closing of the sale of your current home and the closing of the sale of your new one. For example, your lender may need you to take possession of your new home no more than 120 days before or after you sell your current home.

Assumable mortgage

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 want to consider an assumable mortgage, if:

  • you're a buyer and interest rates have gone up since the mortgage was first taken out
  • you're a seller and want to move to a less expensive home but want to avoid prepayment charges because you have several years left on your existing term

Most fixed-rate mortgages can be assumed. Variable-rate mortgages and home equity lines of credit cannot.

Approval of assumable mortgages

In most cases, the lender and the buyer who wants to assume the mortgage must approve the transfer. If approved, the buyer will take over the remaining mortgage payments to the lender and is responsible for the terms and conditions set out in the mortgage contract.

Liability for assumable mortgages

In some provinces, after a mortgage has been assumed, the seller may remain personally liable for the mortgage. This means that if the buyer does not make their mortgage payments, the lender may ask the seller to make the payments. Some lenders may release the seller from being held responsible if the buyer is approved 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 should indicate if you need to pay a fee to complete the transfer.

Cash back

Cash back is an optional feature on some mortgages. It gives you part of your mortgage amount in cash right away. It can help you pay for things you'll need when you get a new home, such as legal fees or furniture.

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

Your lender can 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.

You may be asked to repay some or all of the cash back amount if you decide to break, renegotiate, transfer, or renew your mortgage before the end of the term.

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 on the house is transferred to you.

Title insurance is an insurance policy that protects you as a property owner and your lenders against losses related to the property’s title or ownership such as:

  • survey issues
  • title fraud
  • problems with the title on your property
  • challenges to the ownership of your home

Survey issues could include an error revealed by a new survey where part of your home, such as a deck or garage, is actually on a neighbour’s property.​

Title fraud occurs when criminals steal your identity in order to fraudulently get a larger mortgage on your property or transfer your title to themselves and then sell your house.

Learn how to protect yourself from real estate fraud.

Types of title insurance

There are two types of title insurance:

  • lender title insurance: protects the lender until the mortgage has been paid off
  • homeowner title insurance: protects you as the homeowner from losses as long as you own the home, even if there is no mortgage

How much title insurance costs

You pay a one-time cost, based on the value of your home. The one time cost is called a premium. Premiums generally cost between $150 and $350, but could cost more. If you're the buyer, you’ll generally pay the homeowner title insurance premium when you purchase the property. If you don't buy title insurance right away, you can buy it at a later date.

Where to get title insurance

Title insurance is available from:

  • your lawyer (or notary in Quebec and British Columbia)
  • title insurance companies
  • insurance agents
  • mortgage brokers

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