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Mortgage Basics

6 minute read


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What you need to know about mortgages in Canada

Home ownership is a dream for many. It is also one of biggest financial decisions you will ever make. Whether you’re buying your first home, renewing your mortgage, or just dreaming about your own space, we break down everything you need to know.

What is a mortgage

A mortgage is the loan that you apply for from a credit union, or a bank, to cover the cost of the home you want to buy. You’ll be paying back the money you borrowed plus the interest until you’re eventually mortgage free!

How is a mortgage different from other loans?

If you need a loan for a car, to go to school or to pay off some consumer debt – they work differently than a mortgage. A mortgage is:

  • Secured by the property.
  • Generally paid over 25 years. You may have to renew, or refinance, multiple times throughout your mortgage payment plan – Usually every 5 years or so.
  • Required to have a down payment before you can qualify for the loan.
  • Likely much larger than any other loan you will ever apply for.

10 things you should know about mortgages

Before you set up house viewings with your real estate agent, or start dreaming about the colour you will paint your new bathroom, be sure to get a pre-approval. But how do you know how much you’ll get pre-approved for? To start, you can put your basic information into a mortgage affordability calculator. This is a great place to start to understand approximately what you can afford based on your down payment amount, lifestyle, monthly income, and other monthly obligations.

Once you understand how much you think you can afford, it’s time to meet with us. We’ll be looking for some information such as:

  • Personal information: government I.D., background information such as age and marital status, etc.
  • Financial information: savings you have annual income, 90-day transaction record for payroll deposits or proof of payment, etc.
  • Asset information: other properties owned, RRSP/TFSA, investment balances, vehicles (make, model, year), etc.
  • Debt information:
    • Credit card and lines of credit
    • Child or spousal support payments
    • Car lease or payment information
    • Student loan amounts and payment schedule
    • Personal loan information
  • Down payment information: We will need a confirmation that you have a down payment and how the money was saved (you may need to confirm some of the money as a gift from family or friends and show proof that re-payment is not required).
  • Proof of employment: 90 days of payroll deposit into an account with us, letter of employment, paystub and last year’s T4s, two most recent Notice of Assessments (NOA) from the Canada Revenue Agency, or a combination.
  • Income source information: If you have other sources of income such as a rental suite, part-time work or a pension, we may ask for your T1 Generals as well.
Having a good credit score is important to get the mortgage you need for your dream house. Credit scores typically range from 300-900 and a higher credit score can get you better rates.
This is your key to owning a home. To get approved for a mortgage you will need to have a down payment.

  • If you’re looking to buy a home for $500,000 or less, the minimum down payment is 5%.
  • If your home costs between $500,000 and $999,999, the down payment is 5% for the first $500,000 and then 10% for the remainder.
  • If your home is $1 million or more, you’ll need a minimum 20% down payment.
Don’t forget that when you make a bigger down payment, you end up paying less interest.

Purchase Price Minimum down payment required
$500,000 or less 5% of the purchase price
$500,000 to $999,999 5% of the first $500,000
10% of the portion aboce $500,000
$1 million or more 20% of the purchase price
This is the interest you pay on your mortgage. When interest rates are low, it is the best time to borrow money because you are being charged less interest for your mortgage. There are two types of mortgage interest rates in Canada:

  • Fixed interest rates: This means your interest rate will not change over the term of your mortgage and neither will the principal you pay.
  • Variable interest rates: These move with economic changes and changes to our Prime Rate. Your payments stay the same for the term of your mortgage, but if rates go down, more money will go towards your principal.
Occasionally you may hear about the interest rates set by the Bank of Canada. Everyone must qualify using this rate, however, it’s not what gets charged. It’s used to ensure that the applicant can continue to afford their mortgage when interest rates increase.
When you decide on a fixed or variable mortgage rate you also decide on the amount of time you are committed to that rate. These can range from six months to several years, most common is 5 years. Once your mortgage term is coming for renewal, you can renegotiate the terms of your mortgage. You may find that interest rates have gone down, and you now want to switch from a fixed to a variable mortgage rate.
There are many costs outside of down payments and monthly mortgage payments to consider when buying a home. On average, Canadians pay approximately 2%-4% of the purchase price of a house for additional costs such as land transfer taxes, home inspection fees, legal fees, property tax, mortgage insurance, utility hook-ups and more. For example, a property with a purchase price of $500,000 could see closing costs between $7,500 and $10,000.
You can choose between paying your mortgage once a month, twice a month, every two weeks, or every week. If you decide to pay your mortgage every two weeks, let's say $1,000, instead of once a month at $2,000 you could pay off your mortgage faster because you will have 26 payments that add up to $26,000 at the end of the year instead of $24,000 when you pay once a month.

TIP: Try to make your payments come out of your account on or near your payday!
In Canada, mortgage insurance is offered through the Canada Mortgage and Housing Corporation (CMHC), a government housing agency, Sagen (formally Genworth) and Canada Guaranty. If your down payment is 20% of the purchase price of the house, you don’t need mortgage insurance. If your down payment is less than 20%, your mortgage is considered high-ratio and insurance is a must.

  • Insured mortgage: Protects the lender against non-payment and approvals are normally easier to obtain. This may also be available for a rental property. Insured mortgages generally have lower interest rates.
  • Uninsured mortgage: Mortgages won’t be insured if the property is valued at over $1,000,000, it’s a refinanced mortgage or if the amortization period is more than 25 years.
An amortization period is the total length of time it will take to pay off your mortgage. This could be anywhere from 15, 20 or 25 years. You choose. The most common amortization period is 25 years. Depending on the size of the down payment, the amortization period can be longer or shorter. The amount of time that it takes you to pay off your mortgage will affect the amount of interest that you pay.
There are five types of mortgages in Canada.

  • Open Mortgages: Offers flexibility to make large payments and potentially pay off the mortgage before the term is complete but may have larger interest rates attached.
  • Closed Mortgages: Has a pre-determined interest rate and pre-determined pay-back period. To pay off the mortgage sooner, could mean a financial penalty depending on the terms of your loan.
  • Convertible Mortgages: Allows the homeowner to change the type of mortgage during the term. You could start with an open mortgage and then lock into a closed mortgage.
  • Hybrid Mortgages: These mortgages could include a fixed rate portion, a variable portion, a line of credit or a combination.
  • Reverse mortgages: Homeowners that are 55 years or older can convert the equity they have built in their home into a lump sum payment or monthly payments from the lender. This can be done using a percentage of home equity to fund retirement if needed.

We offer open and closed mortgage types; along with the option to convert between a variable closed mortgage term to a fixed-rate closed mortgage term without any penalties.  This offers the flexibility to change before the end of your term and provides piece of mind knowing you’re not locked into one type for the entire duration.

Take the next step in your home ownership journey

Now that you know more about mortgages, what should you do next? At the very least, you should open a First Home Savings Account (FHSA). FHSAs are tax-free savings accounts with annual contribution limits of $8,000, and a lifetime limit of $40,000. If you are a Canadian resident between the age of majority (19 years in BC) and up to 71 years, looking to buy your first home, you can start contributing to your account.  

Great news: FHSAs are now available from our trusted financial partners, Qtrade Advisor and Qtrade Asset Management. Open your account today by talking to one of our advisors to get started. 

It’s important to get the right mortgage for you. It is one of the biggest financial decisions you will ever make and impacts many years of your life! If you have been thinking about buying a home, now might be the right time as interest rates are starting to increase. 

To understand the type of mortgage you could qualify for, use our mortgage calculator and speak to a mortgage advisor, or apply for a mortgage online today.

You are solely responsible for confirming that your FHSA, TFSA and RRSP contributions are within your allowable limits set by Canada Revenue Agency (CRA). All rules and contribution limits for FHSAs are set out by CRA and applicable legislation apply. Information about FHSAs is based on what is currently available from the Canadian government and may be subject to change.

Mutual funds, other securities and securities related financial planning services are offered through Qtrade Advisor, a division of Credential Qtrade Securities Inc. Financial planning services are available only from advisors who hold financial planning accreditation from applicable regulatory authorities. Mutual funds and related financial planning services are offered through Qtrade Asset Management (a tradename of Credential Asset Management Inc).