Mortgages Explained

What Is a Mortgage?

A mortgage is a type of secured loan used to buy a home or other real estate. You borrow money from a lender and agree to repay it over time — usually with interest — in regular monthly payments. The property itself serves as collateral, meaning the lender can take it back if you don’t repay the loan.

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How Mortgages Work

Mortgages are typically long-term loans, often repaid over 15 to 30 years, though in Canada, common terms are 5 years with amortization periods of 25 or 30 years.

Each mortgage payment usually includes:

• Principal – the amount you borrowed
  
  
• Interest – the cost of borrowing the money
  
  
• Property taxes and insurance – often included in monthly payments
  
  
• Mortgage insurance – if your down payment is less than 20%, this may be required (CMHC insurance)
  
  

Types of Mortgages in Canada

• Fixed-Rate Mortgage
  Your interest rate stays the same for the term (e.g., 5 years). Good for stability and budgeting.
  
  
• Variable-Rate Mortgage
  Your interest rate can change based on the lender’s prime rate. May offer lower initial rates but carries more risk.
  
  
• Open Mortgage
  Can be paid off in full at any time without penalties. Offers flexibility but usually has higher rates.
  
  
• Closed Mortgage
  Lower interest rates, but penalties apply if you pay it off early.

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Key Mortgage Terms

• Down Payment – The portion of the home’s price you pay upfront (minimum 5% in Canada)
  
  
• Amortization Period – Total length of time to repay the loan (typically 25 years)
  
  
• Term – The length of time your mortgage rate and conditions are locked in (often 1 to 5 years)
  
  
• Prepayment Options – Ability to make extra payments toward your mortgage without penalty

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Getting Approved

Lenders look at several factors:

• Credit score
  
  
• Income and employment history
  
  
• Debt-to-income ratio
  
  
• Down payment amount
  
  
• The property’s value
  
  

You’ll also need to pass the mortgage stress test, which checks if you can afford payments if interest rates rise.

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Key Takeaways

• A mortgage is a loan secured by your home, paid back over time with interest.
  
  
• In Canada, most mortgages are renewed every 1 to 5 years, with amortization over 25 to 30 years.
  
  
• Understanding terms, rates, and repayment options is essential before committing to a mortgage.
  
  

Common Questions

Q: What’s the difference between a mortgage term and amortization?
A: The term is the length of your current mortgage agreement (e.g., 5 years). Amortization is the full time it will take to repay the loan (e.g., 25 years).

Q: Can I pay off my mortgage early?
A: Yes, but it depends on your mortgage type. Closed mortgages may charge a penalty; open mortgages allow early repayment without fees.

Q: What is mortgage default insurance?
A: If your down payment is less than 20%, you're required to pay for CMHC (Canada Mortgage and Housing Corporation) insurance, which protects the lender if you default.