Buying a home in Canada is one of the biggest financial steps most people will ever take. Whether you’re a first-time buyer or an experienced homeowner looking to refinance, understanding how home loans work in Canada is essential. Mortgages may seem complicated at first, but once you break them down, the process becomes much clearer.
This guide explains how home loans work in Canada, the types of mortgages available, what lenders look for, and how to prepare for approval.
What Is a Home Loan?
A home loan, commonly called a mortgage, is money borrowed from a lender to buy real estate. In exchange, you agree to repay the loan—plus interest—over a set period. The home itself serves as collateral, which means if you don’t make payments, the lender can take ownership of the property.
In Canada, most home loans are structured as amortized loans, meaning each monthly payment covers both interest and part of the principal. Over time, your payments go more toward reducing the principal balance rather than interest.
Types of Mortgages in Canada
There’s no one-size-fits-all mortgage. The right one for you depends on your financial goals, income, and tolerance for risk. Here are the main types you’ll encounter in Canada:
1. Fixed-Rate Mortgage
A fixed-rate mortgage has the same interest rate for the entire term, which means your payments stay consistent. This is ideal if you prefer stability and want to know exactly how much you’ll pay each month.
Common fixed-rate terms are 1 to 10 years, with 5-year fixed being the most popular in Canada. Even though the overall mortgage may last 25 years (the amortization period), the interest rate is only locked in for the length of the term.
2. Variable-Rate Mortgage
A variable-rate mortgage (VRM) has an interest rate that changes based on the prime lending rate set by your bank. When rates drop, your payments might decrease; when rates rise, they go up.
Some lenders also offer adjustable-rate mortgages (ARMs), where your payments change immediately when the interest rate changes. Others keep your payment amount steady but adjust how much goes toward the principal and interest.
3. Open vs. Closed Mortgages
An open mortgage lets you pay off the balance anytime without penalties, which is great if you expect to move or pay off the loan soon. However, these usually come with higher interest rates.
A closed mortgage limits how much extra you can pay each year but typically offers lower interest rates. Many Canadians choose closed mortgages and take advantage of prepayment options, which let you make extra payments up to a certain percentage annually.
4. High-Ratio vs. Conventional Mortgages
If your down payment is less than 20% of the home’s purchase price, your mortgage is considered high-ratio and requires mortgage insurance from providers like CMHC, Sagen, or Canada Guaranty. This insurance protects the lender in case you default on your loan.
A conventional mortgage doesn’t require insurance because your down payment is at least 20%.
The Mortgage Process in Canada
Here’s what you can expect when applying for a home loan in Canada:
1. Pre-Approval
Before shopping for a home, it’s smart to get pre-approved. This gives you an estimate of how much you can borrow based on your income, debts, and credit history. A pre-approval letter also shows sellers that you’re a serious buyer.
2. Choosing a Lender
You can apply for a mortgage through a bank, a credit union, or a mortgage broker. Brokers can compare rates from multiple lenders to find you the best deal, while banks often offer loyalty perks for existing customers.
3. Submitting an Application
You’ll need to provide documentation such as:
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Proof of income (pay stubs or T4 slips)
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Employment verification
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Credit history
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Proof of down payment
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Details of other debts or financial obligations
4. Approval and Rate Lock
Once approved, you’ll receive a mortgage commitment outlining your rate, term, and conditions. Some lenders let you lock in your rate for up to 120 days, protecting you from rate increases while you shop.
5. Closing
Your lender will send funds to your lawyer or notary, who finalizes the transaction and transfers ownership. You’ll sign the mortgage documents and pay closing costs, which can include legal fees, land transfer taxes, and title insurance.
How Much Can You Afford?
Before applying, it’s important to understand your affordability. Lenders use two main ratios:
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Gross Debt Service (GDS): This measures how much of your income goes toward housing costs (mortgage, taxes, heat, and 50% of condo fees). Ideally, your GDS should be under 35%.
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Total Debt Service (TDS): This includes all debts—credit cards, car loans, student loans—plus housing costs. Your TDS should generally stay below 42%.
Many Canadians use online calculators to estimate how much they can afford, but remember that lenders will verify your numbers carefully.
Interest Rates and Terms
Mortgage rates in Canada can change daily based on the economy, inflation, and the Bank of Canada’s key interest rate. When the central bank raises rates, borrowing costs typically rise too.
Rates can also vary depending on the term (the length of time your rate is locked in). Shorter terms often have lower rates but require more frequent renewals, while longer terms provide stability but might cost more overall.
Mortgage Insurance and Down Payments
If your down payment is less than 20%, you’ll need mortgage default insurance. The premium depends on your loan-to-value ratio and is usually added to your mortgage amount.
The minimum down payment in Canada is:
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5% for homes under $500,000
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10% for the portion between $500,000 and $999,999
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20% for homes $1 million or more (insurance not available)
Saving for a larger down payment can help you reduce interest costs and avoid insurance premiums.
Government Programs for Homebuyers
Canada offers several programs to make homeownership more accessible:
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First-Time Home Buyer Incentive (FTHBI) – The government contributes 5% or 10% of your home’s purchase price in exchange for an equity share in the property, reducing your monthly payments.
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Home Buyers’ Plan (HBP) – Lets you withdraw up to $60,000 from your RRSP tax-free to buy your first home.
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GST/HST New Housing Rebate – Offers a partial refund of the sales tax paid on new or substantially renovated homes.
These programs can significantly reduce upfront costs for qualified buyers.
Renewing or Refinancing Your Mortgage
When your mortgage term ends, you’ll need to renew it—either with the same lender or a new one. This is a good time to negotiate for a better rate.
You can also refinance to access your home’s equity, consolidate debt, or change your mortgage type. Keep in mind that refinancing may involve penalties if you break your existing term early.
Tips for Getting Approved
To improve your chances of getting the best mortgage rate:
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Maintain a strong credit score (above 680 is ideal).
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Keep your debt levels manageable.
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Save for a larger down payment.
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Avoid new loans or credit cards before applying.
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Shop around and compare lenders before committing.
Conclusion
Getting a home loan in Canada can feel overwhelming, but it doesn’t have to be. Once you understand the basics—like how interest rates, terms, and down payments work—you’ll be in a stronger position to make confident decisions.
Whether you’re buying your first condo in Toronto, upgrading to a family home in Calgary, or investing in a cottage in Nova Scotia, taking the time to understand your mortgage options can save you thousands of dollars over the life of your loan.
The key is to plan ahead, ask questions, and choose a mortgage that fits your long-term financial goals—not just the lowest rate on paper.