What is a Mortgage?

This piece was originally written by Tim Bennett in November 2016 and updated on June 17, 2025. 

At its core, a mortgage is simply a loan that helps you buy a home. But it’s easy to feel overwhelmed by the fine print, jargon, and financial what-ifs. Read this guide to learn more about the meaning of mortgage, how it works in Canada, and what to look out for when choosing one.

What is a mortgage?

A mortgage is a type of loan that helps you buy a home or other real estate. You borrow money from a lender, like a bank, credit union, or mortgage company, and agree to pay it back over time, with interest. In Canada, mortgage amounts can range from tens of thousands to several million dollars, depending on the property and your financial situation. As of late 2024, the average new mortgage was about $343,271, though that number can vary by region.

What makes a mortgage different from other loans is that it’s secured by the property itself. That means if you can’t keep up with the payments, the lender has the right to take possession of your home through a legal process called foreclosure or power of sale.

Types of mortgage

Before you commit to a mortgage, it’s worth understanding the different mortgage types available in Canada and what each one means for your long-term financial plans.

1. Fixed vs. variable rate mortgages- This is one of the first choices you’ll make. With a fixed-rate mortgage, your interest rate stays the same for the length of your term (often five years), which means your payments won’t change. It’s predictable and easier to budget for, especially if rates are rising. A variable-rate mortgage, on the other hand, changes along with your lender’s prime rate. If rates drop, you could save money. But if they go up, your payments or the amount of interest you’re paying could increase.
   
   
2. Insured vs. uninsured mortgages- If your down payment is less than 20% of the home’s price, you’ll need an insured mortgage. That means paying for mortgage default insurance, which protects the lender in case you can’t make your payments. It’s an extra cost, but it’s also what allows many Canadians to buy homes with smaller down payments. If you’re putting down 20% or more, you’ll get an uninsured mortgage, which skips the insurance requirement and often comes with better interest rates. Insured mortgages are only available for homes priced up to $1.5 million; homes above this price point must be purchased with a down payment of more than 20%, and have an uninsured mortgage.
   
   Also read: Insured vs uninsured mortgages
   
   
3. Open vs. closed mortgages- An open mortgage gives you more flexibility by letting you make lump-sum payments or pay the home loan off entirely at any time, without penalties. That’s great if you think you’ll sell your home soon or come into extra money. A closed mortgage, by contrast, limits how much extra you can pay and usually comes with penalties if you break the term early. The trade off for the flexibility of an open mortgage is considerably higher interest rate; fixed mortgages are much cheaper, because you’re committing to keep your mortgage for the full term, which poses less risk and overall greater profit to the lender.
   
   Also read: Open vs. closed mortgage: What's the difference?

How do mortgages work?

Mortgages can be complex to understand, and the key to paying less is being informed of your options. Here’s how mortgages typically work in Canada, from application to final payment.

1. Approval criteria 

When you apply, lenders don’t just look at how much you earn. They assess your credit score, employment history, debt-to-income ratios, and down payment to determine your affordability and the amount they're willing to lend. And thanks to the mortgage stress test, you also have to prove you can handle higher payments, even if you're applying for a lower rate. As of 2025, you’ll need to qualify at the higher of:

• The Bank of Canada’s benchmark rate (currently 5.25%), or
• Your contract rate + 2%

As there are currently no Canadian mortgage rates available as low as 3.25% (the threshold that would make 5.25% achievable) all new mortgages are stress tested at a rate of 2% on top of the rate they receive from their bank.

2. The two timeframes

When you get a mortgage in Canada, you're really working with two overlapping timelines:

• The amortization period is the total length of time it takes to pay off the full loan — usually 25 or 30 years.
• The term is how long your current contract lasts — typically one to five years.

At the end of each term, unless you’ve paid off your mortgage in full, you’ll need to renew it, usually with a new rate and terms. You’ll likely go through 4–6 terms and renewals before your mortgage is fully paid off.

3. Payment structure

Every payment chips away at your balance (called the principal) and covers the cost of borrowing (the interest). Early on, most of your payment goes toward interest; it’s only in the later years that your payments start reducing the principal in a big way. You can speed things up by:

• Making lump sum prepayments
• Increasing your regular payment amount (if your mortgage allows it)
• Choosing accelerated bi-weekly payments instead of monthly

Learn more about mortgage prepayments

4. Mortgages evolve over time

Your mortgage isn’t something you set and forget. Over the years, your financial situation, interest rates, or even life plans can change – and your mortgage can, too. You have the option to:

• Switch your mortgage to a different lender while renewing at the end of your term to negotiate a better rate and adjust your payment schedule.
• Refinance to change your loan structure or pull out equity.
• Break your mortgage early, which may come with a penalty.

Down payment

Your down payment is the lump sum amount of money you pay upfront toward the purchase of your home. In Canada, down payment is mandatory for all property purchases, and the minimum required amount depends on the price of the property you’re buying.

• 5% on the first $500,000 of the home’s price
• 10% on the portion between $500,000 and $1,499,999
• 20% if the home price is $1.5 million or more

The more you can put down, the better. A larger down payment reduces the size of your mortgage, which means less interest paid over time and potentially lower monthly payments. If your down payment is less than 20%, you’ll be required to pay for mortgage default insurance, which is added to your mortgage amount and not paid upfront. 

Use our mortgage payment calculator to see how the size of your down payment affects your mortgage's overall cost and monthly payments. 

Amortization period

Your amortization period is the total length of time it will take you to pay off your mortgage in full, most commonly 25 years in Canada. You can extend it to up to 30 years if you’re a first-time home buyer or buying a newly built home. A longer amortization means lower monthly payments, which can make homeownership more affordable in the short term, but you’ll pay more interest overall. A shorter amortization increases your monthly payments but reduces the total interest you’ll pay, helping you build equity faster.

Use our mortgage amortization calculator to compare different scenarios and see how your payments break down over time.

Payment frequency

Payment frequency refers to how often you make your mortgage payments, and it can have a real impact on how quickly you pay off your loan (and how much interest you save). Most lenders in Canada offer these standard options:

• Monthly: 12 payments per year
• Semi-monthly: 24 payments per year
• Bi-weekly: 26 payments per year
• Weekly: 52 payments per year

Some lenders also offer accelerated bi-weekly or weekly payments. These slightly increase each payment, so you end up making the equivalent of one extra monthly payment per year, which helps pay down your principal faster and save on interest.

Prepayment options and penalties

Some mortgages give you more flexibility than others when it comes to paying extra or making changes. If you’re planning to make lump-sum payments, increase your regular payment amount, or pay off your mortgage faster, look for one that offers prepayment privileges.

On the flip side, some mortgages can charge you a prepayment penalty if you need to break your mortgage early, whether you’re moving, refinancing, or switching lenders. These charges vary by lender and mortgage type, but they’re typically:

• Three months’ interest on variable-rate mortgages
• The greater of three months’ interest or the interest rate differential (IRD) on fixed-rate mortgages

The bottom line

A mortgage is more than just a loan – it’s a long-term commitment that comes with a lot of moving parts. From the interest rate you get to how often you make payments, every choice affects how much you’ll pay and how quickly you can pay it off. Whether you’re just starting to explore your options or already comparing rates, the key is to ask questions, use online calculators, and stay informed at every step.

Also read:

• How to Buy a House in Canada in 7 Steps
• Mortgages and Inflation: How Do They Affect Each Other? 
• The 2022 First Home Savings Account
• Can I Afford a $1 Million Dollar Home?
• The Dos and Dont's of Mortgage Pre-Approval
• How Does the Rising Stress Test Impact Mortgage Affordability?
• The Bank of Mom and Dad and Your Down Payment