Canadians' Guide To Getting A Mortgage: Step-By-Step

In Canada, mortgages are loans provided by lenders to help buyers purchase a home. The process of getting a mortgage in Canada involves several steps, including understanding the different types of mortgages, calculating the mortgage interest rate, comparing lenders, and applying for pre-approval. Canadians typically opt for fixed-rate mortgages, where the interest rate remains constant throughout the term, providing more cost certainty. However, variable-rate mortgages are also available, where the interest rate may fluctuate based on market conditions. The mortgage term length in Canada can range from a few months to five years or longer, with most Canadians choosing a five-year term. To qualify for a mortgage, individuals must provide key documents such as photo ID, proof of income, and bank statements. Understanding the mortgage process and requirements is crucial for Canadians seeking to purchase a home.

Mortgage types: fixed-rate vs variable-rate

When taking out a mortgage, Canadians need to decide whether to opt for a fixed-rate or variable-rate deal. This is a significant decision that will affect homeowners for years to come and could result in a difference of thousands of dollars in interest costs.

With a fixed-rate mortgage, the interest rate and monthly payments remain the same for the term of the mortgage. This type of mortgage is popular because it offers stability and predictability. However, if you opt for a fixed-rate mortgage and market interest rates fall, you will need to renew or refinance your deal to benefit from the lower rates, which may involve paying fees. Fixed-rate mortgages also carry high penalties for breaking the contract, for example, due to selling or refinancing.

Variable-rate mortgages, on the other hand, come with interest rates that can fluctuate during the term, according to movements in the prime rate. This means that the interest rate charged can rise or fall. Variable rates tend to be lower than fixed rates because they are inherently less risky for lenders. However, this type of mortgage comes with less predictability, which can make it harder to budget.

In 2021 and 2022, variable mortgage rates were significantly lower than fixed rates, leading to a surge in their popularity. However, in the wake of eight successive rate hikes by the Bank of Canada between March 2022 and January 2023, variable mortgage rates soared, and their popularity plunged. By the end of 2022, 69% of Canadian mortgage holders had a fixed-rate mortgage, compared to 25% with a variable-rate mortgage.

In 2025, as mortgage rates in Canada continue to fall from the highs of 2024, the decision between a fixed or variable rate mortgage depends on the individual's unique situation and risk tolerance.

Mortgage term and amortization period

When taking out a mortgage in Canada, it's important to understand the difference between the mortgage term and the amortization period.

The mortgage term is the length of time your mortgage contract is in effect. Typically, terms range from a few months to five years or more. During this time, the interest rate, lender, payment frequency, and other conditions of your mortgage are locked in and cannot be changed without penalty. At the end of each term, you must renew your mortgage, and you will likely need multiple terms to repay your mortgage in full.

The amortization period, on the other hand, is the total time it takes to repay your mortgage balance in full. This period is an estimate based on the current interest rates and the length of your mortgage term. The most common amortization period in Canada is 25 years. However, if you make a down payment of 20% or more, or meet certain eligibility criteria, you may qualify for a longer amortization period of up to 30 or even 40 years.

It's important to consider the long-term costs when choosing your amortization period. While a longer amortization period can lower your monthly payments, it will also increase the total amount of interest you pay over the life of the loan. Conversely, a shorter amortization period will result in higher monthly payments but lower total interest costs.

You can change your mortgage term at renewal without altering your amortization period, but any changes in payments or rates could still affect the total interest you pay over time. Additionally, if you break your mortgage term early, you may be subject to significant prepayment penalties, so it's important to carefully consider your options before making any changes to your mortgage.

Down payments

A down payment is the amount of money you pay upfront when buying a home. It is calculated as a percentage of the home's purchase price. The minimum down payment in Canada is typically 5% of the first $500,000 of the home's price. For example, a $500,000 home would require a down payment of $25,000. However, if the home's price exceeds $500,000, a minimum down payment of 10% is required for the remaining balance. Thus, a $600,000 home would require a down payment of $35,000 ($25,000 for the first $500,000 and $10,000 for the remaining $100,000).

The standard down payment for a mortgage is 20%, but this can vary between 5% and 35% depending on factors such as the lender, the type of mortgage, and the buyer's financial situation. A higher down payment reduces the size of the mortgage and can eliminate the need for mortgage default insurance, resulting in lower monthly payments and less interest paid over the loan's life.

If the down payment is less than 20% of the home's price, mortgage loan insurance or CMHC insurance is typically required to protect the lender in case of default. This insurance can add significant cost to the total mortgage amount. Self-employed individuals or those with poor credit history may be required to provide a larger down payment or purchase mortgage loan insurance, even if their down payment is above 20%.

There are several acceptable sources for down payments in Canada. The most common sources include savings, investments, and proceeds from the sale of stocks, bonds, or personal property. First-time homebuyers can also take advantage of the RRSP Home Buyers' Plan, which allows them to withdraw up to $35,000 per person or $70,000 per couple from their RRSPs tax-free. Gifted funds from immediate family members are generally accepted, but a signed letter confirming the gift may be required. It is important to note that the down payment funds should have a documented history, and lenders may require proof of accumulation of the funds.

Mortgage pre-approval

In Canada, a mortgage is a loan used to purchase a home over the course of many years. Before applying for a mortgage, it is important to understand the process and requirements to ensure a smooth application. A key step in this process is mortgage pre-approval.

During the pre-approval process, the lender will look at your finances to determine the maximum amount they may lend you and at what interest rate. They will ask for personal information and various documents, and they will likely run a credit check. The minimum credit score for mortgage pre-approval in Canada depends on the lender and whether the mortgage requires default insurance. Most prime lenders require at least 680, especially for CMHC-insured mortgages where the down payment is less than 20%. A higher score (700+) improves your chances of securing better interest rates. Some alternative lenders may approve mortgages with scores as low as 600, but these often come with higher interest rates and stricter terms. It is important to note that pre-approval does not guarantee final approval or that you will receive the full amount offered.

To qualify for pre-approval, you will need to provide key documents and information to the lender. These include:

• Photo ID: Canadian driver's license, passport, and health card
• Job letter: A letter from your employer explaining your job position, length of employment, and income amount
• T4 and/or T4A: To verify your income over the last two years
• T1 General Tax Return: To verify your income if you are commission-based
• Notice of Assessment (NOA): To show a breakdown of your income from the past year, the date your tax return was reviewed, and details of how much you owe or the amount of your refund
• Pay stub: To validate your income and confirm that your job letter and application are aligned
• Bank statement: To verify your balance and where your income is deposited and expenses are paid
• Current and previous employment information
• Sources of verifiable income (e.g. pay stub, employment letter, bank statement)
• Value of properties, automobiles, investments, and savings
• Most recent statements for mortgages, loans, and lines of credit
• Housing expenses (e.g. property tax, annual condo fee, heating costs)

Mortgage renewal

In Canada, a mortgage is a loan used to purchase a home. The mortgage term refers to how long your rate is set for and can range from a few months to five years or longer. Most Canadians opt for a five-year term. At the end of each term, you must renew your mortgage unless you pay the balance in full.

The renewal process can begin up to four months before your renewal date. Some lenders may allow you to renew your mortgage up to six months early without charging a prepayment penalty. Your lender is required to send you a renewal statement at least 21 days before your renewal date. This statement includes the remaining balance, interest rate, payment frequency, and applicable charges and fees. If you are satisfied with the offer, you can accept it. Otherwise, you can negotiate with your lender or switch to another one. If you do not take any action, your lender may automatically renew your mortgage, possibly at a higher interest rate.

Tips for Mortgage Renewal

• Start shopping around a few months before the end of your term. Contact various lenders and mortgage brokers to check if they offer better mortgage options.
• If you receive a better offer from another financial institution, inform your current lender, as you may qualify for a discounted interest rate.
• Learn about basic mortgage concepts to help you make an informed decision about your mortgage terms.
• If you have a variable-rate mortgage, find out what you can do to lower the impact of changing rates at renewal.

Frequently asked questions