How a Mortgage Works in Canada: Payments, Terms and Real Costs
A mortgage is usually the largest debt a household takes on, and its vocabulary can make it harder to compare offers than it should be. This guide explains the main ideas for Canadian borrowers, so you can read an offer and ask your lender better questions.
Amortization and term are different
The amortization is how long the whole mortgage would take to pay off, often 25 years. The term is how long your current rate and conditions last, often five years. At the end of a term you still owe most of the balance and renew, usually at a new rate. That is why it helps to know your balance at renewal, not just your payment.
Fixed-rate compounding
In Canada, fixed-rate mortgages compound no more often than twice a year, while variable-rate mortgages and most US mortgages compound monthly. At the same quoted rate, that gives a slightly lower payment. For $480,000 at 4.79% over 25 years, the monthly payment is about $2,734.60 with semi-annual compounding and about $2,747.62 with monthly compounding. A US calculator can therefore give you the wrong number.
Accelerated payments
An ordinary bi-weekly payment is worked out for 26 payments a year, so it saves little. An accelerated bi-weekly payment is exactly half of the monthly payment, still made 26 times a year, which adds up to one extra monthly payment each year. In the example above, that shortens the mortgage from 25 years to about 21 years and 6 months and saves about $53,697 of interest, if the rate stayed the same throughout.
Down payment and insurance
A larger down payment means a smaller mortgage and less interest. In Canada, a down payment under 20% generally requires mortgage default insurance. The premium is a percentage of the mortgage and is usually added to it, so you pay interest on it too. Minimum down payments and premiums change, so confirm the current rules with your lender.
The costs beyond the payment
Owning a home costs more than the mortgage payment. Budget for:
- Property tax and home insurance.
- Utilities and regular maintenance. Roofs and furnaces wear out on their own schedule.
- Closing costs, which often include legal fees, land transfer tax, a home inspection and moving.
A common guide is to keep housing costs below about a third of your gross monthly income, but the better test is your own budget. Lenders may also test whether you could afford a higher rate than the one you are offered.
Before you sign
- Ask how much extra you can prepay each year without a charge.
- Ask how the penalty is calculated if you break the mortgage early.
- Work out the payment at a rate one or two points higher, to see how renewal could feel.
- Keep an emergency fund after the down payment and closing costs.
Try it: Run your own numbers with the free mortgage calculator, then follow your real payments with the mortgage tracker.
This guide is general information for everyday budgeting, not financial, tax or legal advice. Rules, limits and rates change, so check official sources or ask a qualified professional about your own situation.
Published by Budget Dashboard. Questions or corrections? Contact us.