7 Thinks To Consider When Choosing A Mortgage

Taking the time to understand mortgages is one of the most important things you can do, outside of using common sense to purchase your next home. The two main differences between mortgages are variable rate and fixed rate, but it’s not so black and white.

Key Takeaways

Mortgages are not a one-size-fits-all solution.
The best mortgage is one that suits your lifestyle and personality.
If you compare mortgages from bank to bank, you can’t compare them based on rate alone, it has to be based on rate and rights.
Mortgage brokers might be compensated differently depending on the mortgage they sell. Ask questions, and don’t take their first suggestion, they might be trying to put you into the mortgage they make the best commission on.
Mortgages are as diverse as the housing market itself. Depending on your 5-year plan, your income, your down payment, and your tolerance for risk, the mortgage you choose can drastically impact your pocket.

The Primary Differences Between Variable and Fixed-Rate Mortgages

Let’s start with the basics. Mortgages in Canada are usually amortized over 25 years and are payable in blended payments of interest and principal. The amortization is the total repayment period; the term is shorter, usually 5 years, and it’s the term that gets renegotiated. So every 5 years or so, you can shop for a new mortgage or renew your current one, even though you haven’t paid the whole thing off.

Mortgages are quite flexible, you can also get 30-year amortizations (to lower your payments), and you can also take shorter or longer terms than the average 5 year. In economically uncertain times, some buyers choose a shorter mortgage term so they have the chance to re-negotiate their mortgage in 2 or 3 years instead or locking in for 5 years right now.

Mortgages are classed as either fixed rate or variable rate. The title says it all. A fixed-rate mortgage has a fixed rate for the entire term, so if you “lock in” for 5 years and rates go up, you still pay the same rate you locked in at. A variable-rate mortgage is usually lower than the fixed rate and can save you money, but it fluctuates with the market. If rates go up, your variable payments go up too.

There is a mortgage that blends the best of both variable and fixed mortgages, it’s called a fixed-payment variable mortgage. This is a mortgage where the monthly payment stays the same, but if interest rates go up, less of your monthly payment goes to paying off the principal on the mortgage. These mortgages have a trigger rate, where the bank will re-adjust your monthly payment though. (If you take a 25 year amortization, and interest rates increase to the point that it would take 30+ years to pay off the loan, the bank will force you to pay a higher monthly amount).

Open vs. Closed: The Other Axis You Need to Know

Fixed and variable aren’t the only distinction that matters, mortgages are also either open or closed, and this is a separate decision entirely:

Closed mortgages typically carry lower rates but restrict how much extra you can pay down without penalty.
Open mortgages let you pay off any amount, anytime, without penalty, but come with a noticeably higher rate in exchange for that flexibility.

Most homeowners end up in a closed mortgage because of the rate advantage, but it’s worth explicitly asking your broker or bank which one you’re being offered.

Buyer Beware: The Difference Expands Past the Rate

Be honest with your realtor and mortgage broker when it comes to:

How long you plan to stay in the home.
How much down payment you can afford.
What you want to pay monthly.

If you break the mortgage before the end of the term, you are eligible to pay penalties to the lender. So purchase a home you can foresee staying in for at least 5 years, or plan accordingly. Fixed-rate mortgages generally carry the larger penalties, and here’s why: lenders typically charge the greater of three months’ interest, or the Interest Rate Differential (IRD). The IRD is a calculation based on the gap between your original locked-in rate and the lender’s current rate for the time remaining on your term. When rates have dropped significantly since you signed, that gap is what produces penalties in the tens of thousands, rather than a flat few hundred dollars. All lenders calculate this slightly differently, so ask for the exact formula in writing before you sign, not after you need to break the mortgage.

Some lenders allow you to “port” your mortgage mid-term. So if you’re planning to move in 2 or 3 years, you can take your existing mortgage with you and get an additional mortgage for the difference between the purchase price of your new home and your existing balance.

Watch for Collateral Charge Mortgages

Some lenders, including several major banks, register mortgages as a collateral charge rather than a standard charge. This can make it more expensive or more difficult to switch lenders at renewal, since a new lender may require a full discharge and re-registration rather than a simple transfer. Ask directly whether your mortgage is being registered as a standard charge or a collateral charge before you sign.

Mortgage Insurance: What CMHC Actually Requires

All mortgages with down payments of less than 20% require mortgage default insurance, most commonly through CMHC (Canada Mortgage and Housing Corporation), though private insurers Sagen and Canada Guaranty also offer it. Here’s what the current rules actually require:

Minimum down payment: 5% on the first $500,000 of the purchase price, and 10% on the portion between $500,000 and $1.5 million.
Insured purchase price cap: Homes priced above $1.5 million cannot be insured at all. You’ll need a minimum 20% down payment regardless of your finances.
Premium cost: Roughly 2.8% to 4.0% of your mortgage amount, depending on your down payment size. This premium is added to your mortgage balance and paid down over your amortization, meaning you also pay interest on the premium itself over time.
Amortization: Insured mortgages are capped at 25 years for resale homes, but first-time buyers and buyers of newly constructed homes can now access up to 30 years, a change introduced in late 2024.

The less down payment you put down, the higher your insurance premium, this is one more reason a slightly larger down payment can save real money, beyond just the interest.

Mortgage insurance protects your lender, not you, in the instance you cannot afford to keep your home. But, if you contact your insurer before you miss a payment, they can sometimes intervene and give you a break from payments until a later date.

Never Miss a Mortgage Payment

If you are unable to make your payments, contact your mortgage insurer and then your lender, and ask to defer your payments for a few months. If you cannot defer, ask if you can move from a bi-weekly payment schedule to a monthly one. Once you start missing payments, the bank will work quickly toward foreclosure, and once you’ve been served a foreclosure notice, it’s very hard to undo the process. If you’re in dire circumstances and cannot meet your mortgage payments, there are lenders that will lend you the money to pay off your mortgage under the condition that you sell in the coming months. (Contact us if you need advice — advice is free.)

The Mortgage Stress Test: The Step That Happens Before Everything Else

Before you can even compare rates, you have to qualify, and in Canada, qualifying means passing the mortgage stress test, a rule set by OSFI (the Office of the Superintendent of Financial Institutions). Every federally regulated lender must qualify you at the higher of:

Your contract rate plus 2 percentage points, or
The OSFI benchmark floor rate (currently 5.25%)

If you’re switching mortgages and already own the home, you do not need to be re-stress tested.

Plan Accordingly to Market Conditions

In a market that is dramatically increasing or dropping in value, the bank might not believe the home is worth what you paid for it. The bank will not lend you more than what their appraiser believes the home is worth. Have a plan with your mortgage broker and realtor that minimizes your financial risk. If you have a $200,000 down payment and are buying a home for $600,000, your broker might suggest qualifying for a $450,000 loan with $150,000 down, and saving the remaining $50,000 in case the appraisal comes in under the purchase price. If the appraisal comes in at the purchase price, you can then put the whole $200,000 in as down payment.

Broker vs. Bank: Why the Source Matters

It’s worth being direct about something the industry doesn’t always volunteer: bank mortgage specialists are employees of one lender and can only offer you that lender’s products, while a mortgage broker works with multiple lenders and is typically paid by the lender you choose, not by you. Neither arrangement is inherently better, but it changes whose products you’re being shown.

Become Mortgage-Free 10 Years Earlier

Finally, some mortgages allow you to pay down the principal at an accelerated rate. If you can afford to pay down the mortgage faster, you can drastically shorten the time it takes to pay it off and save tens of thousands of dollars in interest.

Example: A $390,000 loan, amortized over 25 years at 3% interest, costs $853.59 bi-weekly. With an extra $10,000 paid into the mortgage yearly, you can pay it off in 15 years and save $72,138.97 in interest.

Frequently Asked Questions

What is the mortgage stress test in Canada? It’s a federal rule requiring you to qualify for your mortgage at the higher of your contract rate + 2%, or the OSFI benchmark rate (currently 5.25%), even though you’ll actually pay the lower, real contract rate. It’s designed to confirm you could still afford your payments if rates rose.

Is a fixed or variable mortgage better? Neither is universally better, a fixed rate protects you from rate increases but usually starts higher; a variable rate is usually lower but moves with the market. The right choice depends on your risk tolerance, how long you plan to stay in the home, and your monthly cash flow comfort.

How much down payment do I need to buy a home in Canada? The legal minimum is 5% on the first $500,000 of the purchase price, and 10% on the portion between $500,000 and $1.5 million. Homes above $1.5 million require at least 20% down and cannot be insured.

What is CMHC insurance and who does it protect? CMHC (or private insurers Sagen and Canada Guaranty) insures mortgages with less than 20% down. It protects the lender, not the borrower, if you default, but it’s also what allows you to buy with a smaller down payment in the first place.

What happens if I break my mortgage early? You’ll typically pay a penalty; for variable mortgages, usually three months’ interest; for fixed mortgages, the greater of three months’ interest or the Interest Rate Differential (IRD), which can be significantly higher if rates have dropped since you signed.