Mortgage Guide: Understanding Your Financing Options
Mortgages can be confusing. Let me break down everything you need to know about financing your home purchase in Canada.
From Savie Wander
I've helped hundreds of buyers navigate mortgage financing. The mortgage process can seem overwhelming, but understanding the basics helps you make better decisions. This guide covers what I explain to all my clients.
Mortgage Basics: What You Need to Know
A mortgage is a loan secured by your property. If you don't make payments, the lender can take your home. Understanding the key terms helps you make better decisions.
Key Mortgage Terms
Principal
The amount you borrow. If you buy a $600,000 home with a $60,000 down payment, your principal is $540,000.
Interest Rate
The cost of borrowing money, expressed as a percentage. Current rates vary, but even 0.5% difference can mean thousands over the life of your mortgage.
Amortization Period
How long you take to pay off the mortgage. In Canada, maximum is 25 years for insured mortgages (less than 20% down), 30 years for uninsured. Most people choose 25 years.
Term
How long your interest rate is locked in. Common terms are 1, 2, 3, 4, or 5 years. At the end of the term, you renew at current rates.
Example: Understanding the Numbers
Let's say you borrow $500,000 at 5.5% interest for 25 years:
- • Monthly payment: ~$3,050
- • Total paid over 25 years: ~$915,000
- • Total interest: ~$415,000
Use our mortgage calculator to see how different rates and terms affect your payment.
Down Payment Requirements in Canada
Canadian mortgage rules require minimum down payments based on purchase price. Here's what you need to know:
Down Payment Rules
CMHC Insurance
If you put less than 20% down, you need mortgage default insurance (CMHC, Genworth, or Canada Guaranty). This protects the lender if you default.
Insurance Premiums
Premiums are added to your mortgage and vary by down payment:
- • 5-9.99% down: 4.00% of mortgage amount
- • 10-14.99% down: 3.10% of mortgage amount
- • 15-19.99% down: 2.80% of mortgage amount
Use our CMHC calculator to see how down payment affects insurance costs.
Why 20% Down Matters
While you can buy with 5% down, putting 20% down means:
- No mortgage insurance premiums (saves thousands)
- Lower monthly payments
- More equity from day one
- Better interest rates (sometimes)
Fixed vs Variable Rate: Which Is Right for You?
This is one of the biggest decisions you'll make. Here's how I help clients decide:
Fixed Rate Mortgage
Your interest rate stays the same for the entire term (usually 1-5 years).
Pros:
- • Predictable payments
- • Protection from rate increases
- • Easier to budget
Cons:
- • Higher rates than variable
- • Penalties if you break early
- • Don't benefit if rates drop
Variable Rate Mortgage
Your rate changes with the Bank of Canada's prime rate. Payment usually stays the same, but the amount going to principal vs interest changes.
Pros:
- • Lower initial rates
- • Lower penalties if you break
- • Benefit if rates decrease
Cons:
- • Rates can increase
- • Less predictable
- • Can be stressful if rates rise
My Advice
Fixed rates are better if you need certainty and can't handle payment increases. Variable rates are better if you can handle some risk and want to save money (historically, variable rates have been cheaper over the long term). I help clients understand their risk tolerance and make the right choice for their situation.
Choosing Your Mortgage Term
Terms range from 1-5 years (sometimes longer). Here's what to consider:
1-Year Term
Best for: If you think rates will drop soon, or you might sell/move soon. Lowest rates, but you renew every year.
2-3 Year Term
Best for: Balance between rate and flexibility. Good if you're not sure about long-term plans.
4-5 Year Term
Best for: Most people. Lock in a rate for longer, less frequent renewals. Slightly higher rates than shorter terms.
What I Tell My Clients
Most first-time buyers choose 5-year terms. It gives you stability and you don't have to think about renewing for a while. But if you're planning to sell in 2-3 years, a shorter term might make sense. We discuss your plans and choose accordingly.
Payment Frequency Options
You can make payments monthly, bi-weekly, or weekly. Here's how they compare:
Example: $500,000 Mortgage at 5.5%
Bi-weekly and weekly payments result in one extra payment per year, which pays down your mortgage faster.
Accelerated Payments
Many lenders offer "accelerated" bi-weekly or weekly payments. These are calculated as if you're making 13 monthly payments per year instead of 12, which can save you years and thousands in interest.
Example Impact
On a $500,000 mortgage, accelerated bi-weekly payments can save you ~$50,000 in interest and pay off your mortgage 3-4 years faster. The payment difference is usually manageable, and the savings are significant.
Getting Mortgage Approval: What Lenders Look For
Lenders assess your ability to repay. Here's what they evaluate:
1. Credit Score
Minimum 680 for most lenders, but 720+ gets you better rates. Check your credit report for errors before applying.
2. Debt-to-Income Ratio
Your total monthly debt payments (including new mortgage) shouldn't exceed 40-44% of your gross income. Lower is better.
3. Gross Debt Service (GDS) Ratio
Housing costs (mortgage + property taxes + heating + 50% of condo fees) shouldn't exceed 35-39% of gross income.
4. Employment History
Lenders want to see stable employment, usually 2+ years in the same job or field. Self-employed? You'll need 2+ years of tax returns.
5. Down Payment
Must come from your own savings, RRSP (Home Buyers' Plan), or gift from immediate family. Lenders verify the source.
Pro Tip
Before applying, pay down credit card debt, avoid new credit applications, and don't make large purchases. These can hurt your approval or rate.
Mortgage Broker vs Bank: Which Should You Use?
Mortgage Broker
- Shops multiple lenders for you
- Often gets better rates
- Free service (paid by lender)
- Helps with application process
Bank/Financial Institution
- Direct relationship with lender
- Convenient if you bank there
- May offer package deals
- Limited to their products
My Recommendation
I almost always recommend a mortgage broker. They shop multiple lenders, often get better rates, and their service is free. In the GTA, rates can vary significantly between lenders—a broker finds you the best deal. I can refer you to trusted brokers I've worked with.
Common Mortgage Mistakes to Avoid
1. Not Shopping Around
Rates vary significantly between lenders. Even 0.25% difference can save you thousands. Always compare.
2. Focusing Only on Rate
The lowest rate isn't always the best deal. Consider prepayment options, penalties, and flexibility.
3. Not Understanding Penalties
Breaking a fixed-rate mortgage early can cost thousands. Understand penalties before signing.
4. Maxing Out Your Budget
Just because you're approved for $800,000 doesn't mean you should spend it all. Leave room for life.
5. Not Reading the Fine Print
Understand prepayment limits, portability, and all terms before signing. Ask questions.
Ready to Get Pre-Approved?
Let's start your mortgage journey. I can connect you with trusted mortgage brokers and help you understand your options.