Did you know that the average cost of a home in Canada now exceeds $686,650? And in Toronto and Vancouver, they are well over $1 million. Prices have been soaring due to severe supply and demand imbalance. With no signs of rising prices slowing down, a mortgage is all but a necessity to get into a new home.
Are you wondering if you qualify for a mortgage?
We can help. This is HelloSafe’s guide to mortgages in Canada. Learn how they work, how much you can afford, how to get approved and how to get the best mortgage interest rate.
What is a mortgage?
Mortgages are simply loans that help borrowers purchase a home. They are secured by the property itself.
It is a legal contract between you and a lender. 25-year or 30-year amortization periods are common due to the size of most mortgages.
Imagine that you want to move into a $1 million home in Toronto. You bring a $200,000 or 20% down payment. You agree to a 5-year fixed closed mortgage with monthly payments, 2.99% interest and amortization over 25 years.
Your monthly payments would come to $3,782. Each month for the 25 years you would owe this to the bank.
|Amortization||Total principal and interest||Interest||Principal||Balance|
How does a mortgage work?
A home is one of the more expensive purchases you will ever make. You likely cannot afford to move into a new home or condo without a mortgage.
Mortgages are simple. You agree to pay back the lender, with interest, in instalments when you get a mortgage. In exchange, it agrees to let you live in the property it purchased. As you pay back the mortgage, the principal decreases. Principal refers to the initial amount of money that you borrowed.
Mortgages are paid back in terms. After a term ends, usually after 3 or 5 years, you either need to pay the bank back entirely or renew the term. Renewing refers to renegotiating the interest rates and conditions on the remaining balance with the lender and then reentering another term.
When you finish paying off the house, it is yours. This usually takes several terms.
What is mortgage payment frequency?
You will be responsible for making regular instalment payments back to the lender. Frequent repayment terms are:
- Accelerated weekly
- Accelerated biweekly
The terms semi-monthly and biweekly can be confusing. They are not quite the same. Semi-monthly means twice per month for a total of 24 payments per year. On the other hand, biweekly means once every two weeks for 26 total payments per year.
What is a fixed-rate mortgage?
A fixed-rate mortgage is a mortgage whose interest rate does not change during the term. A 5% fixed interest rate means that you will pay 5% until it is time to renew.
What is a variable rate mortgage?
A variable rate mortgage is one in which the interest rate varies. It is based on the prime rate set by the Bank of Canada. The prime rate is 2.45% at the time of publication. For example, imagine that you have a loan at prime rate plus 2% interest. Today you would be paying 4.45% interest on your mortgage. Assuming a fixed payment with a variable interest rate mortgage, a change to the prime rate would mean a larger or smaller percentage of each payment would be applied to paying back the loan. On the other hand, if you have adjustable payments, you could owe more or less money for each instalment.
Fixed vs variable mortage interest rates
Fixed rate mortgages
- Always know what you will pay
- higher initial rates than variable
Variable rate mortgages
- start with a lower interest rate
- may save money
- Uncertainity if rates will increase
What does it mean to renew a mortgage?
Mortgages in Canada are for a specific amount of time, generally ranging from months up to 5 years. When that term is over, you either need to pay back the remaining balance or renew the mortgage.
Your existing lender will provide you with a renewal statement. Check it carefully as their terms may change or your financial situation may have changed. This is a good opportunity to renegotiate terms. You can even shop around for a new lender. Most people will need to renew a mortgage several times before paying it off.
How do I get a mortgage?
The process for getting approved for a mortgage is:
- Shopping for the best interest rate and lender
- Submitting a pre-approval application.
- Receive pre-approval to learn what your budget is
- Go home shopping
- Make an offer
- Wait for your offer to be accepted
- Finalize the details of the mortgage
How do I get pre-approved for a mortgage?
It is a good idea to apply for a pre-approved mortgage before shopping for a home. You can get pre-approval by speaking with lenders directly, speaking with a mortgage broker or applying online. They will ask for proof of a down payment and employment and financial documents. Based on theat information they will tell you how much they are willing to loan you.
How do I get approved for a mortgage?
Once you have picked a home and your offer has been accepted, it is time to return to your lender. They will confirm your down payment and documents proving your identity, employment and financial and spending information.
The initial process of finding a lender is not always easy. You can approach a bank directly or a mortgage broker. The quickest way to get interest rate and monthly payment estimates is by using the comparison tool at the top of this page.
How much of a mortgage can I afford?
A couple making $10,000 per month between them could afford $3,900 in mortgage payments, property taxes, mortgage insurance and related housing expenses.
How large a mortgage you qualify for depends on your income and existing debt. There are two ratios that lenders look at when calculating what you can afford: Gross Debt Service and Total Debt Service.
- Gross Debt Service is the percentage of your monthly income spent on housing costs. It should be under 39%.
- Total Debt Service is the percentage of your monthly income spent on all debt and should be under 44%.
The TDS limit means that outstanding debt from a credit card, car loan, personal loan or student loan impacts your ability to borrow for a mortgage.
What is a high-ratio mortgage?
A high-ratio mortgage is a mortgage where a borrower has made less than a 20% down payment. Conventional mortgages once required a 20% down payment. Today that is no longer necessary. A high ratio mortgage is possible with as little as 5% as a downpayment.
While your down payment can be as low as 5% of the purchase price, 20% is better. It allows you to decline mortgage default insurance to save money. Additionally, you can apply for a 30-year amortization period rather than 25-year one.
As high-ratio mortgages are risker to lenders, they require borrowers to purchase mortgage insurance.
Assume that you purchased a $600,000 condo with a $60,000 down payment. The amortization period is 25 years and the interest rate is 3%, paid monthly.
|For a $600,000 mortgage with $60,000 down payment||Amount|
|Mortgage insurance premium||$16,740|
|Mortgage insurance premium rate||3.1%|
The $16,740 mortgage default insurance premium represents 3.1% of the $540,000 borrowed.
What is mortgage insurance?
Mortgage default insurance protects lenders if a borrower stops making payments on their mortgage. The insurance is paid in full when the borrower gets the mortgage. These are common on high-ratio mortgages.
Mortgage default insurance is not required in Canada if your down payment is at least 20%. It is mandatory if the down payment is under 20%.
How much is mortgage insurance?
Mortgage default insurance ranges from 0.6% to 4.5% of the mortgage.
The percentage depends on the size of the down payment. The smaller the down payment, the higher the perceived risk of the loan and the more expensive the insurance. Manitoba, Ontario, Quebec and Saskatchewan apply Provincial sales tax to this insurance premium.
What is refinancing a mortgage?
Mortgage refinancing refers to renegotiating your mortgage. It can mean cheaper interest rates and more time to pay off your mortgage. It is also powerful way of tapping into the equity you have in your home. You can consolidate other debts and decrease your interest rates. On the other hand, it can lengthen the time it takes to pay off your mortgage.
See our guide to mortgage refinancing to learn all about this this lending method.
What is a second mortgage?
A second mortgage is a second loan on your home. It is a loan against the existing equity in your home rather than on the home itself. Second mortgage loan amounts can go as high as 80% of the value of your home minus the remaining balance on the first mortgage.
A second mortgage does not replace the original mortgage. It means being responsible for making two separate payments!
Curious to learn more? See our complete guide to second mortgages.
What is a reverse mortgage?
A reverse mortgage is a type of loan that allows homeowners over the age of 55 to borrow money from the value of their home. The borrower can receive up to 55% of the appraised value of their property as a lump sum or in instalments. They continue living in their home. The repayment is only due when they move away or the last borrower dies. This is frequently paid by the borrower’s estate after they sell the home.
What is a mortgage broker?
Mortgage brokers are intermediaries who help match borrowers and lenders. They can be an efficient way to find the best mortgage rates. In Canada, they are usually paid a commission from lenders, so they should not cost you money.
They have relationships with multiple banks and lenders, so they are familiar with many products and offers.
Additionally, brokers have existing relationships with banks and save banks time, so they can sometimes negotiate a better rate than if you went yourself.
Since brokers do not all work with the same lenders, what they offer will vary from broker to broker.
How do I pay off my mortgage faster?
One of the best ways to pay a mortgage off faster is to set up accelerated weekly or biweekly payments.
The formula to calculate them is slightly different than standard weekly and biweekly payments. They mean higher instalment payments, but a quick repayment schedule. Imagine you pay $1,000 per month on your mortgage. The is how an accelerated weekly payment would compare to a standard one.
Accelerated weekly formula
Monthly payment ÷ 4 × 52 weeks
This is equal to $250 per week and $13,000 per year
Standard weekly formula
Monthly payment × 12 months ÷ 52 week
This is equal to $230.77 per week and $12,000 per year.
Another tip to pay off your mortgage faster is to refinancing. If you can lower your interest rate, you will have more money to put towards the remaining balance each month.
What is the mortgage rate?
At the time of publication in late 2021, mortgage rates are near a historical low in Canada. Our team has seen rates as low as:
|Type of mortgage||Starting at|
Of course, your mortgage rate will depend on your situation, the property you wish to buy and the lender. As always, shop around for the best rates and terms.
What is a good credit score in Canada for a mortgage?
Canada’s major banks look for a credit score in the mid 600s or higher. Borrowers with lower scores should speak with their broker and alternative lenders.
Higher credit scores may be required to qualify for the very best rates and most favourable terms.
Besides just your credit score, lenders consider the whole of your application. Critical considerations include
- Employment history
- Expenses and spending
- Current debt
- The amount to be borrowed
In 2020 the Canadian Mortgage and Housing Corporation (CMHC), one of Canada’s largest mortgage providers,tightened its conditions to require at least one buyer in a mortgage to have a 680 credit score. These conditions were reversed in summer 2021. Today CMHC requires a minimum score of 600.
Which bank has the best mortgage rates?
The best bank for your mortgage depends on your profile and where and what you are buying. Canada’s Big Five are competitive for buyers with good credit scores. Increasingly online lenders are entering this space and offering great deals to homebuyers. Compare rates anonymously in seconds at the top of this page.
Here is a list of some popular mortgage lenders in Canada:
- ATB Financial mortgages
- BMO mortgages
- CIBC mortgages
- Coast capital mortgages
- Desjardins mortgages
- First National mortgages
- HSBC mortgages
- RMG mortgage
- ScotiaBank mortgages
- True North Mortgage
- Tangerine Mortgage
- Lendwise mortgages
- MCAP mortgage
- Meridian mortgages
- RBC mortgages
- RFA mortgage
- RMG mortgages
- TD mortgages
- Vancity mortgages