Your biggest purchase deserves more than guesswork. Here’s what every first-time home buyer in Canada should know.
If you’re thinking of buying a home, you’ll likely need a mortgage – a home loan – to cover the cost. If you’re like most home buyers, you have plenty of questions.
How do mortgages work?
Is one better than another?
Can I afford a mortgage?
At first, mortgage options and terminology can feel overwhelming, but we’re here to help. Here’s a list of mortgage basics to help you feel more financially confident.
1. A mortgage is divided into terms
A mortgage may take 20 to 30 years to pay off entirely, but it is also divided into shorter periods, known as mortgage terms. At the end of each term, you’ll have the chance to renew or renegotiate mortgage details, including interest rates and options.
- In Canada, mortgage terms typically last five years, although there are shorter and longer options available
- Depending on the type of mortgage you hold, your mortgage rate may change as interest rates move
- When your mortgage is close to renewal, your lender will contact you to talk about rates and options for your next term
2. There are different types of mortgages
You’ve likely heard of “fixed-rate” and “variable-rate” mortgages. But what do they mean? When it comes to mortgage basics, this one is important to understand. Let’s break it down:
Variable-rate mortgage
- Interest rate follows market rate
- Allows you to take advantage of lower rates
- Offers the potential for overall interest savings
- Payments can change as interest rates move
Fixed-rate mortgage
- Interest rate and payments stay the same every month
- Avoids the risk of rising interest rates
- Offers peace of mind, protected from market fluctuations
- Guarantees payments for the length of the mortgage
With these differences in mind, you can further explore mortgage options. For example, some mortgages have flexible payment schedules or options to skip a payment, if needed.
3. You’ll need a down payment
In Canada, when you buy your first home, you need to provide a certain amount of money up front. According to current regulations, here’s what you’ll need for a down payment:
| Property cost | Minimum down payment |
| $500,000 or less | $1.5 million or more |
| $500,000 - $1.5 milllion | 5% of the purchase price |
| $1.5 million or more | 5% of the first $500,000 10% of the remainder of the purchase price |
| 20% of the purchase price
Source: Financial Consumer Agency of Canada |
Here are some other things to know:
- The bigger your down payment, the less interest you’ll pay through a mortgage over time
- Unless you’re able to put down 20% or more, you’ll also need to carry mortgage insurance through Canada Mortgage and Housing Corporation (CMHC)
- You can use savings from multiple sources for your down payment, but when buying your first home, it may be wise to withdraw from registered savings, which can provide tax breaks
- An example of registered savings eligible for your down payment is your First Home Savings Account (FHSA)
- You can also use your Registered Retirement Savings Plan (RRSP) savings through the Home Buyers' Plan (HBP)
- The rules for secondary mortgages (think: cottage or rental property) can be different
4. Do your homework on affordability
Of course, before you tour open houses, it’s important to know your housing budget. How much home can you afford? To calculate properly, it helps to know or estimate factors like:
- Household income
- The mortgage interest rate offered to you
- Monthly bills (water, hydro, etc.)
- Property taxes
- Amortization (the length of your loan)
- Down payment, and more
To do some quick affordability testing, check out our Mortgage Affordability Calculator
For a full picture of how much you can afford, including the influence of your credit score, employment stability, and other factors, it’s a good idea to meet with a Meridian Mortgage specialist.
5. Pre-approval can help you buy a home faster
Just found the perfect spot? If you’re pre-approved for a mortgage, you can move quickly to firm up your purchase.
Here’s how it works:
- Before you make an offer, you’ll take steps towards obtaining a mortgage, without borrowing money
- You’ll then look for homes without any obligation to buy or borrow
- If you find the right place and all conditions have been met, your mortgage will be finalized in a few simple steps
- Most pre-approved mortgages have guaranteed interest rates for 120 days
- If your pre-approval expires, you can create a new one using current interest rates
A pre-approved mortgage, one of the most valuable mortgage basics, allows you to search for your new home with confidence. As long as you haven’t had any significant changes to your employment, credit history, or financial obligations, the pre-approval should seamlessly transition into a full approval.
6. Amortization matters
Amortization is the amount of time it takes to pay off your mortgage in full, including principal and interest payments. Over time, you’ll pay more of the principal back with each payment.
Here’s what else you need to know:
- Your mortgage’s amortization period impacts its total cost
- A shorter amortization means paying less interest, with higher monthly payments
- A longer amortization means the opposite: lower monthly payments, but more interest paid over time
- Common amortization periods include 15, 20, 25, and 30 years
Choosing the right amortization period for your mortgage will help you manage monthly costs, while working towards your long-term goal of being mortgage-free.
7. Get comfortable with mortgage terms
There’s nothing worse than feeling behind. Sometimes learning about mortgages, even mortgage basics, can feel like interpreting another language. Here are a few common terms to keep you up to speed:
Mortgage stress test
In Canada, a stress test is part of the mortgage approval process. It's designed to protect you, in the event that interest rates rise. By qualifying at a higher interest rate upfront, you’ll have more financial resilience, should market conditions change.
High-ratio mortgage
A high-ratio mortgage features a down payment of less than 20% of a home’s value. It is designed to help first-time homebuyers enter the market and requires mortgage default insurance through CMHC.
Loan-to-value ratio (LTV)
This ratio (the mortgage balance divided by the home's value) is used to assess the risk of a mortgage. It is used to help assess the requirement for mortgage insurance and in other borrowing scenarios.
Mortgage refinancing
This process allows you to replace your existing mortgage with a new one. While you may face penalties for ending your mortgage early, refinancing offers the chance for new mortgage terms or rates.As you can see, there's plenty to learn about mortgages. But with mortgage basics in mind, you’ll be better prepared to move forward with your home purchase.
To explore your options with an expert, make an appointment with a Meridian Mortgage specialist.
Learn more about mortgage basics
Help for first-time home buyers
