How Mortgages Work in Canada: A Plain-English Guide
HOMEH Publishing Department
Author Apr 19, 2023 6 min read
A mortgage is the biggest loan most Canadians will ever take on — yet the rules behind it are rarely explained in plain English. This guide walks you through how mortgages actually work in Canada: how much you need down, how the loan is paid off, what the stress test does, and how lenders decide what you can borrow. Once you understand the moving parts, the rest of the home-buying journey gets a lot less intimidating.
Key takeaways- A mortgage is a loan secured by your home; you repay principal plus interest over a long amortization, broken into shorter terms.
- Minimum down payment in Canada starts at 5% and rises with price; under 20% down requires mortgage default insurance.
- To qualify, you must pass the stress test — proving you could afford the greater of your contract rate + 2% or 5.25%.
- Lenders also check your GDS and TDS ratios, aiming for housing costs at or below 39% and total debts at or below 44% of gross income.
- HOMEH gives eligible buyers the industry's highest Cashback Rebate — money that can go straight toward your down payment or closing costs. Sellers list for 1%, or free when they also buy with HOMEH within 6 months, or $395 + HST with a Mere Posting.
What a mortgage actually is
A mortgage is a loan used to buy property, with the home itself serving as collateral. If you stop paying, the lender can ultimately take the property to recover what it's owed. In exchange for that security, lenders offer far lower interest rates than they would on an unsecured loan — which is why a mortgage can stretch over decades rather than years.
Every mortgage payment is split into two parts: principal (the amount you borrowed) and interest (the lender's charge for lending it). Early on, most of each payment goes to interest; over time the balance shifts toward principal. We unpack that shift in our guide to how mortgage amortization works.
The down payment
Your down payment is the cash you pay up front; the mortgage covers the rest. In Canada the minimum scales with the purchase price, so more expensive homes require proportionally more cash.
| Purchase price | Minimum down payment |
|---|---|
| Under $500,000 | 5% |
| $500,000 – $1,499,999 | 5% on the first $500,000, then 10% on the rest |
| $1,500,000 or more | 20% (cannot be insured) |
Amortization vs. term
These two words confuse almost every first-time buyer. The amortization is the total time it takes to pay off the entire mortgage — typically 25 years, though 30-year amortizations are now allowed for first-time buyers and buyers of new builds. The term is the length of your current contract with one lender, usually 1 to 5 years, after which you renew.
In other words, you might sign a 5-year term within a 25-year amortization. When the term ends you renew the remaining balance — see our mortgage renewal guide for how to get the best deal at that point.
Fixed or variable, open or closed
Within your term you choose a rate type. A fixed rate stays the same for the whole term; a variable rate moves with your lender's prime rate, which tracks the Bank of Canada's policy rate. Each has trade-offs around certainty and cost — we compare them head-to-head in fixed vs variable mortgage rate.
You'll also choose between an open mortgage (pay it off anytime with no penalty, but higher rates) and a closed mortgage (lower rates, but penalties for breaking early). Most buyers choose closed mortgages for the lower rate.
How lenders decide what you can borrow
Two tests determine your borrowing power. First, the federal stress test: at a federally regulated lender, you must qualify at the greater of your contract rate plus 2% or the 5.25% benchmark floor. This proves you could still afford payments if rates rose. See what the mortgage stress test is for the full picture.
Second, lenders measure your debt against your income using two ratios:
GDS (Gross Debt Service) covers your mortgage, property taxes, heat and half of any condo fees. TDS (Total Debt Service) adds every other debt — car loans, credit cards, lines of credit. Staying within these limits is key to approval.
Getting started the smart way
Before you shop, get a sense of the numbers. Run scenarios through the HOMEH mortgage calculator, then understand the difference between a quick estimate and a real commitment in pre-approval vs pre-qualification. If you're buying your first home, our first-time home buyer guide ties it all together.
Frequently asked questions
What's the difference between amortization and term?
How much down payment do I need in Canada?
What is the mortgage stress test?
What are GDS and TDS?
Ready to put this into action?
Get pre-qualified in five minutes, or talk to a HOMEH advisor — no credit pull, no commitment.
