Buying a home is a major step. For first-time buyers in Canada, the process can feel confusing. One key part of buying a home is understanding mortgage terms. A mortgage is a loan used to buy property. You pay it back over time with interest. This guide explains mortgage terms in clear, simple language. It will help you make better decisions when choosing your first home loan.
1. What Is a Mortgage Term?
A mortgage term is the length of time your mortgage contract is in effect. In Canada, terms usually range from six months to 10 years. During this time, your interest rate, payment schedule, and lender conditions remain the same. When the term ends, you can renew, refinance, or pay off the mortgage.
2. What Is an Amortization Period?
The amortization period is the total time it will take to fully pay off your mortgage. In Canada, the standard period is 25 years. Some lenders offer up to 30 years if you make a down payment of at least 20%. A longer amortization period means lower monthly payments, but you pay more interest over time. A shorter period means higher payments, but you pay less interest.
3. Fixed vs. Variable Interest Rates
Fixed-Rate Mortgage
With a fixed-rate mortgage, your interest rate stays the same for the full term. Your payments do not change. This helps with budgeting.
Pros:
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Predictable payments
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No surprise rate increases
Cons:
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Higher rate than variable
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Costs more if interest rates drop
Variable-Rate Mortgage
With a variable-rate mortgage, the rate can change based on the lender’s prime rate. Some lenders adjust the interest portion of your payment while keeping the total payment the same.
Pros:
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Lower initial rate
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Possible savings if rates stay low
Cons:
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Risk of higher payments
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Less predictable
4. Open vs. Closed Mortgages
Open Mortgage
An open mortgage allows you to pay off the loan or make large payments at any time without a penalty. This option usually has a higher interest rate. It is best if you plan to pay off the mortgage soon or may sell the home in the short term.
Closed Mortgage
A closed mortgage limits how much extra you can pay without penalty. This option offers a lower interest rate. It suits buyers who plan to stay in the home and make regular payments.
5. Short-Term vs. Long-Term Mortgages
A short-term mortgage usually lasts one to three years. It often has a lower rate but must be renewed sooner. A long-term mortgage lasts five to ten years. It offers more rate stability. First-time buyers often choose a five-year term to balance rate protection and flexibility.
6. Mortgage Pre-Approval
Mortgage pre-approval is a process where the lender checks your income, debts, and credit. You receive an estimate of how much you can borrow. A pre-approval also locks in an interest rate for a limited time, usually 90 to 120 days.
Benefits of pre-approval:
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Sets a clear budget
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Shows sellers you are serious
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Helps you act fast when you find a home
7. Down Payment Rules in Canada
The minimum down payment depends on the purchase price:
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For homes under $500,000: Minimum 5%
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For homes between $500,000 and $999,999: 5% on the first $500,000, 10% on the rest
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For homes $1 million or more: Minimum 20%
If your down payment is less than 20%, you must get mortgage default insurance through CMHC or another insurer. This protects the lender if you fail to make payments.
8. Mortgage Default Insurance
Mortgage default insurance is required for high-ratio mortgages (less than 20% down payment). The cost is a percentage of the loan and is added to the mortgage. It allows buyers with small down payments to enter the housing market.
9. Prepayment Privileges
Many lenders allow you to make extra payments without penalties. This helps you pay off the mortgage faster and reduce interest costs.
Common prepayment options:
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Lump-sum payments (e.g., up to 15% of the original amount per year)
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Increasing your regular payment (e.g., up to 15% annually)
Check your mortgage agreement for the specific rules.
10. Penalties for Breaking a Mortgage
If you break your mortgage before the term ends, you may face a penalty. This often happens when selling a home or refinancing. The penalty depends on the mortgage type and lender. Fixed-rate mortgages often have higher penalties than variable-rate mortgages.
11. Mortgage Portability
Porting your mortgage means transferring your current loan and interest rate to a new property. This avoids early payout penalties. It works best if you are upgrading your home but want to keep your current loan terms.
12. Government Programs for First-Time Buyers
First-Time Home Buyer Incentive
This program offers 5% or 10% of a home’s purchase price as a shared equity loan. You repay the amount when you sell or after 25 years, whichever comes first. It lowers your mortgage payments without increasing your down payment.
Home Buyers’ Plan (HBP)
The HBP allows you to withdraw up to $60,000 from your RRSP to buy your first home. You must repay the amount over 15 years. Couples can withdraw up to $120,000 together.
GST/HST New Housing Rebate
If you buy a new home or renovate substantially, you may qualify for a partial refund of the GST or HST paid.
13. Choosing the Right Term
Ask these questions:
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How long do I plan to stay in the home?
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Do I expect my income to change?
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Can I handle changes in interest rates?
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Do I plan to make extra payments?
If you want stable payments and plan to stay long-term, choose a five-year fixed-rate mortgage. If you expect to move or refinance, consider a shorter term or an open mortgage.
Conclusion
Understanding mortgage terms helps first-time buyers in Canada choose wisely. Key parts include the mortgage term, amortization period, interest rate type, and prepayment rules. Programs like the First-Time Home Buyer Incentive and the Home Buyers’ Plan can also help reduce costs. By knowing these basics, you can make informed choices and buy a home with confidence.
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