The Ultimate Guide to Mortgages in Canada: How They Work, Start to Finish

This guide explains how a Canadian mortgage works and walks through the sequence every borrower goes through, from the first affordability check to renewal. Each step gets a short summary and a link to the guide that covers it in full. If you want to compare the products themselves, start with the overview of mortgage types or browse the mortgage types and features hub.

What a mortgage is

A mortgage is a loan secured by real property. The lender advances money toward the purchase, and the mortgage is registered against the home’s title as security; you own the home, and the lender holds a charge on it until the debt is repaid. In the contract you are the mortgagor and the lender is the mortgagee.

If you stop paying, the lender can enforce that security under provincial law, either by selling the home or through a court process; how that works province by province is covered in the foreclosure and power of sale process.

The parts of a mortgage

Term and amortization. Because the term is shorter than the amortization, a Canadian mortgage is renewed several times before it’s paid off: a 25-year amortization with five-year terms is renewed four times, each time at the rates on offer then. The difference is explained in full in term vs amortization.

How payments split between interest and principal. Each payment covers the interest owed for the period first, and the rest reduces the principal. Early in the amortization most of the payment is interest, which is why extra payments made early cut the total interest the most.

How the rate is compounded affects that split slightly; see semi-annual compounding.

Step 1: Work out what you can afford

Lenders look at two ratios: housing costs as a share of gross income (GDS) and housing costs plus other debt payments (TDS). For an insured mortgage, CMHC caps your housing costs at 39% of gross income (GDS) and your housing costs plus other debt payments at 44% (TDS); lenders set their own limits for uninsured mortgages. How the ratios are calculated is in GDS and TDS explained, and the mortgage affordability calculator turns your income, debts and down payment into a price range.

Lenders also weigh your credit history, the stability of your income and the property itself. What credit score lenders look for is covered in credit score needed for a mortgage.

Step 2: Save the down payment

The minimum down payment is 5% of the first $500,000 and 10% of the rest for homes under $1.5 million, and 20% at $1.5 million or more. Below 20% down the mortgage needs default insurance, whose cost and avoidance are covered in what CMHC insurance is; the down payment tiers and premium schedule are in the CMHC mortgage rules, and the down payment calculator works out your minimum.

Savings, the First Home Savings Account, an RRSP withdrawal under the Home Buyers’ Plan and a gift from family are the usual sources; how to save for a down payment compares them.

Step 3: Pass the stress test

Lenders check that you could afford the payments at the greater of your contract rate plus 2% or 5.25%, a floor set by OSFI for uninsured mortgages and by the federal government's mortgage insurance rules (the Minister of Finance's Eligible Mortgage Loan Regulations) for insured ones. The full rule, including when a lender switch at renewal is exempt, is in the mortgage stress test, and the stress test calculator shows the payment you qualify at.

Step 4: Choose a rate type and term

The rate you’re offered depends on bond yields (for fixed rates), the Bank of Canada’s policy rate through prime (for variable rates), whether the mortgage is insured, and your own credit and equity; how mortgage rates are determined explains each factor, and current rates are on the mortgage rates page.

The main product choices are fixed or variable, a 3-year or 5-year term, an open or closed mortgage, and a 25-year or 30-year amortization (who can get a 30-year amortization on an insured mortgage is in the 30-year amortization rules).

Step 5: Get pre-approved

A mortgage preapproval can hold an interest rate for 60 to 130 days, depending on the lender, but it isn't an approval: the lender still checks the property and can refuse you, and the preapproved amount is the most you may get, not a promise. What the lender asks for and how pre-approval differs from pre-qualification are in mortgage pre-approval and the mortgage document checklist; how a rate hold works is covered separately.

Step 6: Choose a lender

Banks, credit unions, monoline lenders reached through brokers, and alternative and private lenders all write mortgages in Canada, at different rates and with different rules; types of mortgage lenders compares them, and what a mortgage broker does explains how a broker shops lenders for you. Borrowers the banks decline often start with a B-lender.

Beyond the rate, a few contract terms decide what the mortgage costs if your plans change:

1. How much you can prepay each year: see prepayment privileges.
2. How the penalty to break it is calculated: see how mortgage penalties are calculated.
3. Whether you can move it to a new home: see porting a mortgage.
4. Whether it’s registered as a standard or a collateral charge, which affects switching lenders later.

Step 7: From accepted offer to closing

Once an offer is accepted, the lender reviews the property (often with an appraisal), you complete any home inspection and remove conditions, and a lawyer or notary registers the mortgage and transfers title on closing day. The step-by-step timeline is in offer to closing.

Closing costs come on top of the down payment: land transfer tax in most provinces, legal fees, title insurance, adjustments and, in some provinces, sales tax on the insurance premium. The closing cost calculator adds them up by province.

Step 8: Make payments and pay it down

Accelerated weekly or biweekly payments add the equivalent of one extra monthly payment a year, which shortens the amortization; the options are compared in mortgage payment frequency. Lump sums and payment increases within your prepayment privileges do the same, and paying off a mortgage early shows how much each saves.

Step 9: Renew at the end of each term

If your mortgage is with a federally regulated lender, such as a bank, the lender must send you a renewal statement at least 21 days before your term ends, or tell you by then that it won't renew; the statement shows the balance, interest rate, payment frequency, term and any fees, and says the rate offered won't go up before the renewal date. Renewal is the point where you can switch lenders or rate types without a penalty; the steps are in the mortgage renewal guide, and moving to a new lender is covered in switching mortgage lenders.

If rates are higher than when you signed, the new payment can rise sharply; the payment shock calculator estimates the increase, and extending your amortization is one way lenders lower it.

Step 10: Refinance or borrow against your equity

Refinancing replaces the mortgage before or at the end of the term, usually to borrow more, consolidate debt or change the rate. Breaking a closed mortgage, paying it off early or prepaying more than your privileges allow usually costs the higher of 3 months' interest and the interest rate differential (IRD) on a fixed rate, and typically 3 months' interest on a variable rate; your mortgage contract sets the exact method and comparison rate, and a federally regulated lender must tell you how it calculates the penalty. When refinancing pays is covered in when to refinance.

Once you’ve built equity, you can also borrow against it with a home equity line of credit, a home equity loan or a refinance; the three are compared in mortgage vs home equity loan vs HELOC. Older homeowners have a fourth option, a reverse mortgage.

Special situations

• First-time buyers have their own tax credits, rebates and provincial programs; they’re listed in first-time home buyer programs, and the first-time buyer guide walks through the purchase.
• Self-employed borrowers qualify on documented income, usually averaged over two years; see mortgages for the self-employed.
• Borrowers with credit problems have fewer lenders to choose from and pay more; see mortgages with bad credit and improving your score for a mortgage.
• Newcomers with a short Canadian credit history can use newcomer programs at many lenders; see mortgages for newcomers.
• Rental properties need a larger down payment and are qualified differently; see rental income and mortgage qualification.

Where to go next