What Is a Mortgage? How Canadian Mortgages Work

What is a mortgage? It is a loan secured against the home it helps you buy. In Canada the lender registers a charge on your property title, so the home itself stands as collateral until the debt is repaid. That security is why mortgage rates are usually lower than unsecured borrowing rates, and why the balance is repaid over a long amortization schedule rather than in one lump sum.

How a Canadian mortgage actually works

Your down payment covers part of the purchase price and the mortgage covers the rest. On closing day the lender advances the money to the seller, and you repay the lender with interest over time. Each scheduled payment is split between interest and principal. Early in the amortization, interest takes the larger share; as the balance falls, more of every payment goes toward principal.

You can arrange a mortgage directly with a bank or credit union, or work with a mortgage broker who compares products from several lenders. Brokers are usually paid by the lender rather than by you, but their compensation can differ by product, so it is fair to ask how they are paid. Whoever arranges the loan, your contract is with the lender, and those terms are what bind you.

Canadian fixed-rate mortgages are compounded semi-annually rather than monthly, a detail that changes the effective annual cost of borrowing. Payments are most often made monthly, but many lenders offer accelerated bi-weekly or weekly schedules that quietly increase the amount you pay over a year. You can model those differences with the mortgage payment calculator.

The choices baked into every mortgage

A mortgage is not a single product but a bundle of decisions. Getting these right matters more than chasing a headline rate, because a low rate on the wrong structure can still cost you money.

• Term — the length of the contract with your lender, commonly a few years, after which you renew or pay the loan out.
• Amortization — the total time scheduled to clear the loan, often up to 25 years for insured mortgages.
• Rate type — fixed, variable, or a hybrid that begins fixed and converts later.
• Payment frequency — monthly, semi-monthly, bi-weekly, or weekly.
• Prepayment privileges — how much extra you may pay each year without a penalty.

Term and amortization are easy to confuse, so the difference between mortgage term and amortization is worth understanding before you sign anything. Each choice interacts with the others, which is why it pays to think about the whole package rather than one feature at a time.

Fixed, variable, open, and closed

Rate type and prepayment structure are two separate choices. A mortgage can be fixed and closed, variable and closed, or open in either rate type. Open mortgages let you pay off or prepay any amount at any time, usually at a higher rate, while closed mortgages trade flexibility for a lower rate. Breaking a closed fixed mortgage early typically triggers an interest rate differential (IRD) penalty, which can be substantial.

Weighing those trade-offs is the subject of fixed versus variable mortgage rates. The short version is that neither option is universally cheaper, and the better fit depends on your budget and how long you expect to keep the mortgage.

What mortgage default insurance does

If your down payment is below 20% of the purchase price, your lender will normally require mortgage default insurance, also called mortgage loan insurance. This protects the lender, not you, if you stop paying. It is provided by CMHC, Sagen, or Canada Guaranty, and the premium is calculated as a percentage of the loan, usually added to your mortgage balance. The guide to mortgage default insurance explains how those premiums are set and when insurance is required.

Insurance does not replace your down payment, and it does not protect your equity. If you default and the lender sells the home for less than you owe, the insurer may cover the lender's loss, but you can still be pursued for the shortfall. Insurance makes a small down payment possible; it does not remove the risk of owning.

Costs that travel with the loan

The mortgage payment is only part of owning a home. You also carry property taxes, heating, maintenance, and possibly condo fees, and a lender counts those costs when measuring affordability. Upfront there are closing costs such as a home inspection, title insurance, legal fees, and provincial land transfer tax. Lenders assess your capacity using debt-service ratios rather than the loan amount alone, which is why the GDS and TDS ratios matter so much to approval.

It also helps to know that a mortgage rate is not a single number. Lenders publish a posted rate and then discount it, and the rate you are offered depends on your credit history, down payment, property type, and whether the loan is insured. Rates move constantly, so treat any figure you see as a snapshot that must be confirmed with your lender on the day you lock in.

Mistakes that cost borrowers

1. Borrowing the maximum a lender will approve instead of an amount you can comfortably repay.
2. Ignoring prepayment limits and the penalty for breaking a closed fixed mortgage.
3. Assuming a pre-approval guarantees a mortgage, when final approval still depends on the property and your documents.
4. Forgetting that insurance premiums, taxes, and maintenance add to the real cost of ownership.

Understanding these pieces turns a mortgage from a mystery into a set of choices you control. Start with the amount you can genuinely afford, then choose a structure that matches how long you plan to keep the home and how much flexibility you need. Confirm the current rules and rates with your lender before you commit.