How Does a Canadian Mortgage Work?

Before buying your first home in Canada, your first logical step would be to research and learn all about mortgages and how they work. Even though you might get help from mortgage brokers and other specialists, you’ll find the mortgage process much easier if you become more knowledgeable about what you need and want.

Here are some important things to know about how a Canadian mortgage works.

What is a mortgage?

“A mortgage is a loan a bank or any lender gives you to help you purchase a home.” 

When you buy a home for the first time, you will most likely only be able to pay for a small portion of the buying price. That small part that you pay is considered a down payment on the house. Using that down payment, you’ll be able to request a bank or lender to help cover the remaining buying price of the house. The loan you get from the lender is called a mortgage. 

Important mortgage facts:

  1. It’s a legally binding agreement between you and your bank. 
  2. You may have to go through a stress test to ensure that you can afford your mortgage. 
  3. You may have to renew your mortgage with different lenders in the future to get better interest rates or benefits that suit you. 
  4. If you decide to break your terms of agreement with your bank ahead of time, you may have to pay a penalty. 
  5. The lender has a legal right over your property. If you do not pay on time, they may choose to take your house from you.
  6. The amount the bank is willing to loan you will also depend on how much you qualify for. The qualification criteria are different for each lender. 

Key terms to remember: 

Amortization: It’s usually referred to as the life of the loan.

Mortgage: This is the loan the lender provides to help you buy a house. 

Mortgage Broker: These are specialists who help you find a good deal with lenders when it comes to mortgages. 

Lien: This is the right to keep possession of property belonging to another person until a debt owed by that person is discharged.

The right type of mortgage for you

One of the main decisions you’ll make when buying your home is choosing the type of mortgage you want to take on. 

There are mainly 3 points to focus on:

Type of mortgage | Mortgage term | Amortization period

  1. Types of mortgage: Open or closed.

    Open Mortgages
    - Open mortgages are really flexible. They’re the perfect option if you want to make large payments on your mortgage or pay it all off without penalty. However, the interest rate could change over the course of an open mortgage. People who choose this type of mortgage are willing to accept fluctuations in the interest rate in exchange for the flexibility of paying off their mortgage early.

    Closed Mortgages -
    Closed mortgages come with a set interest rate over a set time. This makes budgeting easier since you’ll always know what your mortgage payment will be. However, if you pay off your mortgage early, you’ll have to pay your bank or lender a penalty. You can also choose a variable rate for your closed mortgage, which is typically lower than a fixed rate, but it can fluctuate over time.

“You’ll find that closed mortgages often have lower interest rates than open mortgages.”

Mortgage term - Generally, the term for a mortgage ranges from 6 months to 10 years. This is set by your bank.

Amortization period - This period is the total amount of time it will take you to completely pay off your mortgage. 

Tip: The longer your amortization period, the lower your monthly payments will be. 

How do I apply for a mortgage? 

Congratulations on taking the first step to owning your house! Applying for a mortgage with us is fairly easy and straightforward. We’re going to need some details from you to assess and advise you on the next steps. Here is a mortgage application checklist to help you out. You can then contact us and our team would be happy to help you out with your application. 

What happens if I can’t pay off my mortgage? 

Life happens. Sometimes there’s a sudden change in your circumstances that makes affording mortgage payments beyond challenging. That’s why we recommend mortgage insurance. For only a small amount added to your mortgage payments each month, you’ll be protected against losing your home.

If you don’t have mortgage insurance and can no longer afford payments, your lender will always try to work out some sort of solution for you first. Ask about skip-a-payment programs as one example. It’s only when there is no other choice that your lender will claim your home and put it up for sale via auction, to get back or recover the money they loaned you. 

Can my mortgage application be denied? 

Yes, a bank can decline your mortgage application based on things like your credit score, payment history, or outstanding debts. Success criteria may vary across lenders.

If a bank denies your application, try other lenders who may not have selection criteria as tough as a bank.