For most of us, buying a home means getting a mortgage. Very few people can afford to purchase a home or property on their own without any financial help. A mortgage is a loan that is secured against property, i.e. a loan that is secured against your house.
A mortgage loan typically amounts to most of the value of a property or home, and allows people to buy, live and use property without paying the total value of the property all at once. In exchange, the mortgage holder is required to pay a set amount of interest on the loan. The person/people purchasing the property don't actually own it until the mortgage is fully paid off, the mortgage lender (i.e. the bank) effectively owns it in the meantime.
Mortgage lenders require a down payment, which is a percentage of the total value of the property you are buying, in order to loan you the money. For example, if a property was valued at 0,000 and you needed to put down a 10% down payment, this would equal a ,000 down payment (0,000 x 10%). This would result in the mortgage lender providing you with a ,000 mortgage (0,000 property value - ,000 down payment) and a loan to value (LTV) ratio of ,000/0,000 = 90%.
Ready to start looking at mortgage rates? Check out the Best Mortgage Rates in Canada.
Well, like all loans, there is a catch - interest. Your mortgage must be paid back with interest, which is the profit the mortgage lender makes on the loan.
Mortgage lenders provide various repayment options which make up the different mortgages that are available.
In Canada, if you have a down payment of 20% or more of the property purchase price, you will need what is called a conventional mortgage. If your down payment is less than 20% of the property purchase price, you will need a high ratio mortgage, which is unique to Canada.
A high ratio mortgage means that the lender is providing more money to purchase the property, as the borrower is only providing a small down payment, this results in higher risk for the lender.
Therefore, the lender requires protection in the form of insurance. This insurance is called mortgage default insurance and it protects the lender if the borrower can't pay back the loan. The insurance premium is paid for by the borrower.
There used to be quite a few mortgage default insurance providers in Canada, but with the recent financial crisis, some of the recent US competitors have pulled out of the market leaving Canadian Mortgage and Housing Corporation (CMHC) and Genworth Financial as the main Canadian mortgage default insurance providers.
There are 3 main types of mortgages:
- Open Mortgage
- Closed Mortgage
- Convertible Mortgage
Open mortgages are very handy as they are the most flexible option and allow you to make large payments or pay off the entire mortgage without a penalty. However, there is usually a price for this added flexibility. Open mortgages typically have higher mortgage rates than the closed equivalent. Normally, the type of consumer who opts for an open mortgage can live with some changes in the interest rates, and really values the ability to pay off the entire mortgage if they want.
Keep in mind that other mortgage types enable you to pay off up to 20% of the mortgage value once a year without any additional fees; and this amount can go towards paying down the principal. In addition, some lenders offer the option to increase your regular payments (weekly/monthly) by up to 20% without incurring any fees.
Closed mortgages provide additional stability to customers as they are arranged at a set interest rate for a period of time enabling easy forecasting and planning. Many lenders charge a penalty if the mortgage is repaid early and these can be quite hefty. But, if you're on a very uncompetitive rate versus the market it may be worth speaking to a mortgage broker as sometimes it's worth paying this hefty penalty to get onto the lower rate deal. (Also, visit our mortgage penalty calculator to help you figure out just how much it will cost you to break your existing mortgage contract.)
Closed mortgages generally have lower interest rates than open mortgages as the lenders are able to forecast the amounts their loans will generate.
A convertible mortgage is a flexible option that allows you to change the type of mortgage you have over a certain period. For example, you can lock into a longer term mortgage before your current term expires without having to pay a penalty. This option can be beneficial if you think interest rates are going to rise and you want to fix your rate early. Not all lenders offer convertible mortgages. There are restrictions so be sure to read the fine print for this type of mortgage product.
An interest rate is the percentage amount of interest charged on a loan. A mortgage interest rate or mortgage rate is the percentage amount charged on a mortgage loan. There are 2 main types of mortgage rates: fixed mortgage rates & variable mortgage rates.
Fixed rate mortgages mean that your interest rate will stay fixed for a certain period of time, i.e. it will not change over the term of your mortgage. You will be able to know on a monthly (or weekly, bi weekly, etc) basis exactly how much your payments will be and how much you will still owe the lender and will need to pay off at the end of the term.
These mortgages typically range from 6 months to 25 years. This means that if someone took out a 15 year mortgage, the rate will be fixed for 15 years, then the borrower could choose to arrange a different type of mortgage until it's paid off. Most people opt for a fixed mortgage rate with a term of 2 - 5 years.
A variable rate mortgage, also known as an adjustable rate mortgage (ARM), fluctuates when interest rates rise or fall for the length of the term. Interest rates fluctuate with the lenders prime lending rate which fluctuate with the Bank of Canada's target for the overnight rate. These rates can change at the Bank of Canada rate announcements which typically occur every 6 weeks or so.
The variable rate mortgage is a good option if you think that interest rates will decrease or stay low.
Fixed and variable mortgage rates are affected by different factors. Fixed mortgage rates are affected by Canadian bond yields. Typically if the 5 year bond yield goes down, 5 year fixed mortgage rates will also decrease. Whereas variable mortgage rates are driven by the Bank of Canada's key overnight lending rate. For more information on this subject, read: What Affects Variables and Fixed Rates in Canada.
Note: One difference when calculating mortgage rates in Canada is that, all mortgages are compounded semi-annually, by law, except variable or adjustable rate mortgages. This differs to the US where mortgage rates assume a monthly compound period. This means that if you see a Canadian mortgage rate of 6%, the mortgage will actually have an effective annual rate (EAR) of 6.09%, based on 3% semi-annually.
Mortgage rates offered in the market can fluctuate daily. This can make shopping for a mortgage a bit of a challenge - no one likes it when they lock in a fixed rate and then find out that rates have dropped the next month. Many mortgage lenders overcome this by offering 'rate hold' period where if you are pre-approved for a mortgage rate, the lender will hold that rate for you for a period up to 120 days. If rates go up during that time, you will still get the lower rate provided the transaction closes within the rate hold period.
Although it is near impossible to predict with 100 percent certainty where the rates will move to, it's helpful to hear what the experts in the industry have to say about it.
Our RateSupermarket.ca Mortgage Rate Outlook Panel is a monthly outlook for fixed and variable mortgage rates. Our independent panel of experts consider key economic indicators and then share their thoughts on whether or not mortgage rates will go up, down or stay the same over the next 30-45 days.
Mortgage repayments are made up of 2 different parts, the principal (the money borrowed) and the interest (the fee charged for lending the money). The more money you can pay as a down payment, the less you will need to borrow, resulting in less interest paid over the length of the mortgage.
Many lenders will offer you different payment options such as:
- Bi-weekly rapid or accelerated
- Weekly rapid or accelerated
Visit our mortgage rate calculator to see how the different payment options will effect your total interest paid.
This tends to be the most common option, your mortgage payment will be withdrawn from your bank account once a month, i.e. on the 1st day of each month.
Your mortgage payments are taken twice a month, such as the 1st and the 15th and are 1/2 of the monthly amount. So you end up paying the same amount over the course of the year as you would with the monthly option.
If you pay ,000 per month X 12 months = ,000, with the bi-weekly option you would pay 0 twice a month - ,000 X 24 payments = ,000.
This option is useful if you wish to match your mortgage payments with your pay cheque if you get paid every 2 weeks.
Your mortgage payments are half of the monthly payment amount, but they are collected every two weeks
If your monthly payment is ,000 then the bi-weekly rapid payment will be 0. Payments are made on the same day every 2nd week and at least twice a year you will have three payments in one month.
If you pay ,000 per month X 12 months = ,000 in payments for the year, but if you pay bi-weekly then it is ,000 X 26 payments = ,000. The amount of interest is the same, therefore, the additional payment of ,000 will be deducted from the balance owing on your mortgage.
You will also make an extra small deduction from the mortgage balance because you are making small payments faster than if they were larger, once a month payments.
For more information on how you could benefit from accelerated payments, read: Accelerated Payments.
This option takes your monthly option multiplies it by 12 months and divides it by 52 weeks in a year. Again, you pay the same amount in a year as the monthly option.
A very small amount of savings may be gained due to 3/4 of your payment being made early each month. Again, this may be a good option if you wish to match your mortgage payments with your pay day.
This option is the same as bi-weekly rapid, except that the payments occur on the same day every week, meaning your payments will be 1/4 of your normal monthly payment.
Sometimes there are 5 weeks in the month and you will have 5 payments in that month. This will happen at least 4 times a year.
If you pay ,000 per month X 12 months = ,000, then you will pay 0 per week X 52 weeks = ,000. You pay an extra ,000 per year, which will be deducted from your mortgage balance.
For more information on how you could benefit from accelerated payments, read: Accelerated Payments.
During your mortgage search you may see terms such as 10/10 or 20/20 which are sometimes referred to as prepayments, double up payments or lump sum payments. These refer to 2 types of additional payments that lenders allow you to make: one- off payments and increases to your normal payments.
For example, a 20/20 prepayment option would be broken down as follows:
- The first 20 means you could pay a lump sum up to 20% of the value of the original principal once annually
- The second 20 means you could increase your normal weekly/bi-monthly/monthly payments by up to 20%
If you can afford it, making these additional payments can save you loads of money over the course of the mortgage as you will be reducing the principal more quickly; hence, reducing the interest you will have to pay. Each lender has different guidelines and rules, so be sure to check the fine print of your mortgage agreement!
The amortization is the length of time, usually years, it takes to pay off a mortgage, assuming that:
- the interest rate and payment amount do not change
- that all payments are made on time
- no additional payments are made
The longest amortization period in Canada used to be 25 years, however that has changed. A few years back, the government allowed the market to open up and the CMHC started insuring mortgages with 40 year amortizations. However, after the credit crunch and the housing crisis in the US, they reversed that decision and stopped insuring mortgages with any amortization periods longer than 35 days in October 2008.
If you spread your loan over a longer period (such as 35 years) this means you will have lower payments in the short term, however, if you increase your outlook, it will cost you a lot more in the long run. Common wisdom says it is advantageous to use the shortest amortization period that you can afford. This will save you thousands of dollars in interest - and think of what you could buy with that!
Our handy mortgage rate calculator can show you exactly how much interest you will be charged using various amortization periods. You can also select different payment options to see how a bi-weekly rapid payment schedule will save you money compared to a normal monthly payment schedule.
A mortgage broker is an independent agent, who works for you, the borrower, and is a go-between for a network of mortgage lenders and you. As mortgage brokers can arrange hundreds of millions of dollars in mortgages annually, they can typically get you a better rate from lenders than if you approached the same lender yourself. It's a simple case of economies of scale - lenders will offer the broker the best rate in order to continue to get the large volume of business they generate each year.
It's free! The vast majority of mortgage brokers won't charge you for their services (unless its a highly complicated situation). They receive payment from the lenders once your mortgage is secured. The mortgage broker will go to all the available lenders they work with to find the best product to meet your needs. Many brokers can work with up to 85 different lenders.
This volume of options contrasts largely with a situation where you approach your local bank to see their best rates. They can only offer you their rates, and they may not be that flexible.
As a result, more mortgages are being arranged through brokers in Canada. Currently, an estimated 25-30% of mortgages are arranged through brokers according the Canadian Association of Accredited Mortgage Professionals (CAAMP). Despite this growth the broker industry still has a long way to go compared to other countries. In the USA the mortgage brokers' share of new mortgages rose to 60 percent in the past 10 years from a 20-percent market share in the late 1980s, according to Wholesale Access, a consulting firm.
For more information, read: What is a Mortgage Broker.
When searching for a mortgage, you may come across these two conflicting terms.
- Pre-Qualification - A pre-qualification compares your personal income versus your debt to industry ratios, and will tell you the price range of the loan you qualify for. You don't have a pre-approved mortgage after you go through pre-qualification.
- Pre-Approval - A pre-approval, on the other hand, is a conditional commitment by a mortgage lender to give you the loan. It is much more in-depth than a pre-qualification and is best to get fairly early on in the home buying process. Pre-approval makes it possible for the mortgage provider to give you more accurate advice because they have a better understanding of your situation.
Pre-approval is usually provided by you to the seller when you make a bid on a property. If you were to obtain a pre-approval, it would show that you are a more qualified buyer and greatly increase your chances of winning a bid on a property. Some mortgage lenders offer a program that will allow you to send and clear your pre-approval loan conditions and offer you a protection option for your rate during the home search process - called a rate guarantee or rate hold. This can be for up to 120 days.
For more information read: Pre-Approved vs. Pre-Qualified.
There are a few ways you can reduce the amount owing on your mortgage faster:
- Increasing the frequency of your payments i.e. go from monthly payments to bi-weekly rapid payments
- Make yearly prepayments
- Increase your monthly/bi-weekly/weekly prepayments
- Shorten your amortization period
For other ways to save on your mortgage, check out our Save on Your Mortgage Infographic.
We've also put together a step by step guide for How to Pay Off Your Mortgage Faster.
How to Find the Best Mortgage Rate
Looking for the best mortgage rates, but don't know where to start? Check out the How It Works Video below.
3 Easy Ways To Find The Best Mortgage Rate
Step 1: Check out the best rates in the country. Visit the Best Mortgage Rates page and see what is offered in your province.
Step 2: Compare, compare, compare. See how your mortgage rate stacks up to the best - and how much you could be saving.
Step 3: Connect with an expert. Have a question about a mortgage rate? Speak to a mortgage specialist today.
Learn Even More About Mortgages!
What will your mortgage cost? Check out the Mortgage Rate Calculator to determine your monthly payments. Curious about your borrowing options? Try the Mortgage Affordability Calculator. Thinking about breaking your mortgage early? Use the Mortgage Penalty Calculator to see the associated fees.
Are mortgage rates headed up or down - or will the remain unchanged for the coming month? Read the Mortgage Rate Outlook Panel for the expert take on short term mortgage rate activity.
Check out the best Canadian mortgage learning resource for info on the fastest way to pay off your mortgage, changing mortgage rates, fixed and variable mortgage rates, and more.
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