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A mortgage is a big step toward homeownership. The right home loan can save you hundreds each month and tens of thousands in interest payments, in the long run. The goal is to lock in a mortgage that offers the cheapest rate and the best terms. To find the right mortgage, you need to compare rates, terms, flexibility and prepayment options. Take the time to compare your mortgage options and you’ll not only find a home loan that keeps monthly payments manageable, but also offers you flexibility and options while helping minimize total debt costs.
If you’re in the market for a home loan and looking to compare mortgages, here’s what you need to know.
What is a mortgage? And how does a mortgage work?
A mortgage is a loan that helps you buy or refinance a property, such as your primary residence, a vacation home or a real estate investment. As a home loan, a mortgage uses the property as a form of collateral — the lender is given the legal right to take ownership of the property should you default on your mortgage payments. By using the property as collateral, lenders are able to provide lower interest rates on the home loan — and this keeps overall costs on such a large loan more affordable.
But let’s take a step back: How do mortgages work in Canada?
The total sum that you borrow is called the principal. To repay the principal, you are required to make monthly payments. Over time, these monthly payments reduce your overall debt until the total sum is repaid.
However, to use borrowed money you must pay a fee. In Canada, this fee is calculated using a mortgage rate. This rate is expressed as an annual interest rate, which is used to calculate the money owed to your lender. Remember, this interest rate is the lender’s profit, so the higher the rate, the more profit they make, while the lower the rate, the cheaper it is for you to borrow the money.
To make it easy, the calculation and repayment of a mortgage is amortized over a period of time. In Canada, the most common amortization is 25 years — meaning your monthly loan and interest repayments are calculated so you are completely debt-free within 25 years.
Keep in mind, most Canadian mortgage lenders use an amortization to calculate your mortgage repayments, but your contractual term will be much shorter. This contractual term is the length of time you are legally obligated to make mortgage and interest payments to that specific lender. Once the term is complete, you may still have a loan balance. At this point, you may repay the entire outstanding loan amount, renew with your current lender for another term, or negotiate with a new lender.
If you decide to end your current mortgage contract — break your mortgage before the end of the term — you will be required to pay a penalty to the lender. If you have a variable-rate mortgage, this penalty is equal to three-months worth of interest (based on your current mortgage interest rate). If you have a fixed-rate mortgage, your penalty is calculated using the Interest Rate Differential (IRD) formula. This formula is different for each lender and may cost you tens-of-thousands in extra fees. Call your lender before breaking your mortgage to avoid any nasty surprises.
To determine your interest rate, a lender will review a number of factors including your credit score, proposed down payment, assets, debt and income. These details help a lender assess your likelihood of paying back the loan, which ultimately determines approval and the best mortgage rate offered.
Where can I get a mortgage?
You can get a mortgage from most banks and credit unions and through brokers that work with networks of lenders looking to connect with borrowers. Most lenders require at least some footwork with a loan officer by phone or in person, but at there are also newer digital companies that offer an application process that is completely online.
A-Lenders. These are retail lenders and include banks, such as the big 5 major Canadian banks as well as smaller, regional banks, along with national and regional credit unions.
B-Lenders. This category of mortgage lenders is dominated by monoline lenders — lenders that only offer mortgages in the Canadian marketplace (hence, monoline, which refers to one line of business). Also known as mono-lenders, these lenders can be tand-alone companies, such as Home Trust, private lenders, such as mortgage investment corporations or an affiliate of an A-lender, such as First National, which is the mono-line lender affiliated with CIBC. Non-Canadian banks who offer mortgages are also classified as B-lenders.
Direct lenders. Also known as alternative lenders or private lenders, these lenders specialize in mortgages and originate their own loans. They finance home loans — also called portfolio loans — with their own funds or by borrowing the money. Direct lenders use private funds and are not under the same regulatory scrutiny as A-lenders or B-lenders. This also means direct lenders can be more flexible when working with self-employed or poor credit clients but it also means they get to set their own requirements and loan terms.
Mortgage brokers. Brokers are not mortgage lenders, but they do serve as a critical connection between borrowers and lenders. Many B-lenders only work with mortgage brokers (so, no direct contact with borrowers), plus many A-lenders and direct lenders work with brokers.
When shopping for a mortgage, the amount of down payment you provide will help determine whether or not you will get a conventional or high-ratio mortgage.
Conventional or traditional mortgage. If you put down 20% or more down on the purchase of your property, you will be given a conventional (aka: traditional) mortgage.
Insured or high-ratio mortgage. If your down payment is less than 20%, you will get an insured mortgage. Also known as a high-ratio mortgage, these home loans require the purchase of mortgage default insurance, which is commonly referred to as mortgage loan insurance, mortgage fees or CMHC insurance. The premium for this insurance is on a sliding scale — you pay more fees when you put down less down payment — and added to the total sum you borrow. (Keep in mind, you’ll also pay PST on the mortgage insurance at the time of closing.)
Whether you get a conventional mortgage or not, you will still need to determine the type of mortgage you require. First, you must decide between an open or closed mortgage.
Open mortgage. An open mortgage gives you the option to repay the debt at any time without incurring any penalties. This flexility is ideal if you are close to paying down your full mortgage debt or you anticipate a windfall that will let you pay down a large portion of the debt. Given the flexibility, most open mortgages come with variable interest rates and these rates are typically higher, since lenders won’t make as much on your long-term repayments.
Closed mortgage. A closed mortgage requires you to repay your mortgage debt over a specific period of time, known as a term. If you elect to make extra payments, the lender may charge you a penalty, known as a prepayment penalty. This is because the lender is banking on the interest payments included in your mortgage payments as a way of earning a return. This guarantee of business also means lenders can reduce the mortgage rates offered on closed mortgages.
Next, you’ll need to decide on the type of mortgage you want:
Fixed-rate mortgage. Fixed rate mortgages are the most common type of mortgage in Canada. They come with regular monthly payments that don’t fluctuate according to market conditions. They also offer set interest rates that remain the same for the duration of your term.
Variable-rate mortgage.A variable rate mortgage has an interest rate that can change throughout the life of your loan term. Variable rates fluctuate based on the prime rate, which is typically determined by the Bank of Canada’s overnight lending rate. A variable rate is usually expressed as the prime rate + or – a number, with the number being a percentage set by your lender.
Cash back mortgage. With this type of mortgage, your lender will typically advance you a cash back lump sum when your mortgage closes. While cash back rates vary between lenders, you can usually expect anywhere from 1-5% cash back.
Reverse mortgage. This involves getting a loan that allows you to access money from the equity in your home. You can typically borrow up to a certain percentage – usually a maximum of 80% – of the equity that you own in your home. With high interest rates, these types of mortgages are not recommended and come with a high risk. Since you have to be 55 years or older to qualify, you could eventually lose your house to the lender if you’re unable to pay back the loan.
Overview: How do I compare mortgages?
The best mortgage for your situation should meet your needs while providing the lowest rates and the best terms and conditions.
Decide on a loan type. Learn more about whether a fixed or adjustable rate is best for your property, budget and financial goals.
Shop around. Compare the fees, rates and terms of at least two lenders based on your preferred loan type and how much you can afford up front.
Compare APRs. Because it includes your loan’s fees, an APR can be a more accurate way to compare loans than fees or base rates themselves.
Learn about rate locks. If you find a rate you like, ask about locking it in until you settle on your home to avoid an increased rate when you’re ready to apply.
Ask about prepayment penalties. Paying more than your minimum payment can shave years off your loan. Make sure your loan applies any extra to your principal without penalty fees.
Ask for a loan estimate. Lenders are required by law to provide your interest rates, payments, closing costs and key figures to compare like information across loan offers.
Repeat, if needed. Ask for estimates from as many lenders as you’d like until you find a loan you’re happy with.
Decide on a loan type: What are the different types of mortgages?
There are two predominent mortgage types when it comes to the calculation of mortgage interest: fixed and variable. Fixed-rate mortgages offer a predictable payment each month, while variable rates fluctuate with the market, but are usually lower.
Fixed-rate mortgages
Fixed interest rate mortgages are the most common in Canada. They allow you to lock in a rate for anywhere from six months to 10 years. Your rate and payments won’t change over the term, giving you the security of consistent mortgage payments you can budget around. Once your term ends, you’ll need to refinance your mortgage – either with your current lender or a new lender.
Who is a fixed-rate mortgage best for?
Those who like to budget. Your payments won’t change for the life of the term, meaning you can rest easy knowing exactly how much you’ll pay each month.
The risk averse. If you don’t want to take a risk on fluctuating market rates, a fixed-rate can give you peace of mind.
Variable rate mortgages
A variable rate mortgage — also known as an adjustable rate mortgage — comes with an interest rate that fluctuates with the market. Over the course of your mortgage, your payments will rise or fall depending on the prime rate. The prime rate is set by your lender, however most lenders change their prime rate when the Bank of Canada change their overnight lending rate. While there’s a chance that you’ll pay less than you would with a fixed-rate mortgage – especially for the first few years – your payments could rise later on to an amount you can’t afford.
Who is a variable rate mortgage best for?
Those who can afford higher payments. Depending on market conditions, the prime rate could rise, and your lender could increase the interest rate that’s attached to the prime. In any case, you’ll want to budget for potential increased rates – especially if the market takes a turn.
Those looking to take a risk to try and save money. For the most part, variable mortgages can be much cheaper than fixed-rate mortgages – but again, this all depends on future markets.
Combination or hybrid mortgages
A hybrid mortgage, which is also referred to as a combination or a 50/50 mortgage, is a combination of both a fixed-rate and a variable rate. Usually, half of your mortgage will be financed at a fixed-rate while the other half will be financed at a variable rate. The terms for both financing options will be different, which can make understanding your mortgage slightly difficult – but it allows you to take advantage of both types of rates.
Convertible rate mortgages
A convertible mortgage is one that gives you plenty of freedom throughout the life of your mortgage. You can typically move between a variable rate and a fixed-rate, or choose a longer or shorter term and pay no penalties for making these changes. If the prime rate is currently low but you expect it to rise in the future, this type of mortgage can help you take advantage of current low variable rates and then switch to a fixed-rate once the prime rate rises.
How are mortgage rates calculated?
By law in Canada, interest on fixed-rate mortgages is compounded semi-annually, or twice a year. During this time, any unpaid mortgage interest is added to the principal amount, which then earns interest on itself. You should note that your quoted APR and your actual APR may differ slightly because of compounding – with your actual APR being slightly higher than the quoted APR. As a general rule, the more often a mortgage is compounded, the higher the interest will be.
If you have a variable rate mortgage, compounding varies and it’s much harder to calculate since your interest payments will fluctuate based on the market. One month your interest rate might be 2.5% and the next it could be 2.6%, which will ultimately affect how much interest you pay.
When you first start out paying your mortgage, you’ll be paying more toward interest and less toward your principal balance. As each month passes, your principal debt will drop and more of your monthly payment will go to paying off the debt.
Did you know
You don’t have to settle for a monthly mortgage payment. You can pay weekly or bi-weekly and even accelerated bi-weekly. The extra frequency allows you to pay off your mortgage faster, which reduces the total amount of interest you pay. In general, paying your mortgage weekly or bi-weekly is the equivalent of paying an extra month, each year.
Interest rates vs. APR
When you’re looking to take out a mortgage or refinance your existing mortgage, you might see both APR and interest rates — and they’re not the same thing. The interest rate, expressed as a percentage, is the amount that you’ll pay to the lender to borrow money. The APR, which is the annual percentage rate, is usually higher than the interest rate, because it includes interest as well as additional fees that you’ll pay like origination fees and closing costs.
When you’re shopping for a mortgage, comparing the APRs will give you a better sense of the cost of the mortgage. The higher the APR, the higher the combined cost of the fees and interest rate.
To get the best mortgage, consider using these five tips.
Compare multiple lenders. Get quotes from at least two lenders for the type of mortgages you want. Don’t forget to ask if there are better options in the current market.
Check your credit score. A credit score of 740 or higher can open the door to competitive interest rates and low down payments.
Qualify for special programs. Government, provincial and local programs may offer lower rates and more flexible terms than a traditional mortgage.
Save at least 20%, or not. Quite often homebuyers are told to save at least 20% for a down payment, but lenders don’t reserve their most competitive rates for these buyers. In fact, insured mortgages usually come with the most competitive mortgage rates (since the lender is given some assurance, should you default on your loan).
Lower your debt-to-income ratio. Your total debt load affects the loans you qualify for. Try to pay down credit cards or loan balances when you’re shopping for the best rate.
Mortgages for first-time homebuyers
With increasing housing prices and a fast-moving marketplace, getting on the housing ladder these days is no easy task. However, the Government of Canada have created incentives to help get first-time homebuyers on the marketplace much faster and easier. Some of these incentives include:
Home Buyers Plan. You can now withdraw up to $35,000 from your RRSP and use it towards your down payment. You’ll have 15 years to pay this money back, but it’s interest-free and a great way to increase your down payment and reduce your mortgage default insurance premiums.
Tax-Free First Home Savings Account. Scheduled to roll out in 2023, the FHSA allows Canadians to contribute up to $8,000 to the account, up to a maximum of $40,000. When the funds are withdrawn for the purpose of buying a home, the earnings in the FHSA (and any withdrawals) are tax-free.
First-Time Home Buyers (FTHB) tax credit. Claim up to $5,000 in tax credits on costs associated with purchasing your first home. Associated costs might include land transfer tax, legal fees or disbursements.
GST/HST New Housing Rebate. You can qualify for a rebate to recover part of your GST or HST payments that you paid on the purchase price, on the cost of renovating or adding additions, or on converting a non-residential property into a home.
First-Time Home Buyer Incentive. Eligible first-time homeowners who have a minimum down payment for an insured mortgage can apply to finance a small portion of their home through a shared equity mortgage with the Government of Canada.
How do I get pre-approved for a mortgage?
To get the ball rolling with your home-buying process, start with these four steps:
Check your credit score. You should know where you stand before getting preapproval. Most lenders look at your credit score before approving you for a mortgage. Aim to have a credit score of at least 660, while scores 759 or higher usually qualify for the best rates. The minimum credit score to get a mortgage depends on the type of loan you’re getting.
Calculate your debt-to-income (DTI) ratio.Your DTI reveals if you can afford the monthly mortgage payment. Most lenders want your total debt, including your new home loan, to be no more than 43% of your total income. To find your DTI, divide your total amount of recurring monthly debt by your gross monthly income. Note that recurring monthly debt typically only includes monthly payments that show up on a credit report, including credit cards, car payments and student loans.
Find a lender. Banks, credit unions and online financial institutions are the most common types of lenders. Talk to more than one so you can compare rates, fees and loan options.
Get preapproved. Fill out some personal information and provide all necessary documents and information to your lender.
What is a mortgage pre-approval?
A mortgage pre-approval is a letter from a lender stating a specific monetary amount that they are willing to lend you for the purchase of your home. This is based on a number of factors, including your income, debt and credit score.
A mortgage pre-approval is not a promise that you’ll get a loan. It’s a statement that your lender has evaluated your finances and is willing to finance your purchase.
Difference between pre-qualification and pre-approval
The terms “pre-qualification” and “pre-approval” are often used interchangeably. It really depends on how your lender defines the first step in its mortgage process. Both pre-qualification and pre-approval provide useful information about how much you may be able to borrow.
Pre-qualification generally refers to an informal evaluation of your finances. You provide the lender with information about your income, assets, credit and debts. The lender doesn’t verify this information, but uses it to estimate whether you can qualify for a mortgage and approximately how much you can borrow. If you’re confident about your finances, you might skip pre-qualification and go straight for a pre-approval.
Pre-approval is much more involved and requires documentation. Unlike pre-qualification, lenders verify your income, assets and liabilities during pre-approval. Lenders will also pull your credit, which may temporarily drop your credit score. But pre-approval typically holds more weight to sellers and realtors.
Benefits of getting pre-approved
Getting pre-approved is beneficial for several reasons. Most importantly, you’ll have an accurate idea of how much you can actually afford to spend on a new property. Having a pre-approval letter can also give you an advantage over other buyers.
Bringing a pre-approval letter to a buyer or real estate agent shows that you’re prepared and serious about making a purchase. It proves that you can get a loan for at least the asking price of the house or property.
Requirements to get pre-approved for a mortgage
Here’s what lenders look for during the mortgage pre-approval process:
Proof of income. Lenders want to make sure you have enough income to afford a new monthly mortgage payment.
Proof of assets. If you have any assets like stocks, bonds, savings accounts, retirement accounts or equity in another property, your lender will want to see the documentation for them.
Employment verification. Lenders ask for verification of employment in the form of pay stubs and your most current Notices of Assessment. If you’re self-employed, you’ll need to provide at least 2 years of tax returns to verify your income.
Residence history. Lenders may ask for proof of your residency for the past 2 years. This could be a letter from your landlord if you rent, or proof of your current mortgage if you already own a home.
Other documents you may need to provide
Most lenders will require these documents when you apply for a mortgage:
3-6 months of bank statements
T1, T4 or T4A statements of income
Notices of Assessment from the most recent income tax returns
A valid driver’s license or Canadian passport
Divorce papers to use alimony or child support as qualifying income
Gift letter, if funding your down payment with a financial gift from a relative
Third-party bank statements, if someone else pays for a considerable amount of your debt, such as parents paying for your student loans
Can I get a mortgage pre-approval if I’m self-employed?
Self-employed borrowers are treated a bit differently than other borrowers. You’ll need to have at least 2 years of tax returns that show your business income. If you’ve only been self-employed for one year, most lenders won’t pre-approve you unless you have significant alternative sources of income, a cosigner or a spouse who could put the home in his or her name.
You’ll also need to show proper documentation, such as T1 tax returns and T4A forms.
Keep in mind that any business expenses that you write off for tax purposes are deducted from your total income, which can put you at a disadvantage when applying for a mortgage. While you should take advantage of eligible tax write-offs for your business, you may want to pick and choose what you write off if you know you’ll be applying for a mortgage. Speak with a tax professional before making any decisions.
Once you’re pre-approved, keep a close eye on your finances until the entire mortgage process is complete. Any changes to your financial situation from the time you’re pre-approved to the date of your closing can impact your ability to finalize the loan.
Avoid changes in income. Don’t quit or change jobs in this timeframe.
Avoid accumulating new debt. Now is not the time to buy a new car or finance living room furniture.
Make payments on time. Late or missed payments affect your credit score, and a lower credit score might affect your mortgage eligibility.
Stay in touch with your lender. Keep your lender in the loop when you’re ready to make an offer on a property, especially if any numbers have changed since you last spoke.
What is a bad credit mortgage?
At their core, bad credit mortgages are similar to regular mortgages: You save a deposit, borrow an amount of money, then pay it back with interest. But because you have poor credit the loan will be a little more restricted or have higher fees and charges.
A typical bad credit mortgage has:
Higher interest rates. Loans for credit-impaired borrowers are usually much higher than the most competitive loan rates.
Higher fees. Ongoing and upfront mortgage fees are far more common with bad credit loans.
Lower LVR. The loan-to-value ratio (LVR) is the amount of the loan against the value of the home. A lower LVR affects your borrowing power. This means you may need to save a deposit greater than 20% of your property’s value.
What is the minimum credit score that I need to get a home loan?
When getting a mortgage, your credit score is an essential part of the decision-making process for lenders, if not the most important. Typically, credit scores range from 300 to 900, and lenders look for good scores of 700 or above. You can find lenders that provide mortgages to borrowers with scores below 700, but your rate and terms won’t be favourable.
The type of mortgage you’re applying for will also affect the minimum credit score requirements.
Understand how you ended up with bad credit
Start by understanding the causes behind your credit problems. You may find your credit history damaged if you:
Have unpaid bills. Make sure you keep your payments up to date and on time.
Have been declined for a loan. If you have recently been declined a home loan this will be recorded on your credit file. Many lenders will see this as a sign of impaired credit.
Made late payments. Late payments will also affect your credit history but they will not have as much of an effect as unpaid bills.
Have applied for credit too often. It is a general rule of thumb that you should only make an inquiry for credit once every 6 months. Any more than this could raise a red flag to lenders.
Have been declared bankrupt. If you have been declared bankrupt then you will have a bad credit rating that will stay on your credit file for 7 years.
8 tips to apply for a mortgage with bad credit and get approved
When applying for a mortgage with bad credit, there are a number of things borrowers can do to help their chances:
1. Get a copy of your credit file
All of your prospective home loan lenders will have a close look at your credit history before granting you a home loan, so you want to be able to discuss the negative marks on your credit file with confidence. You can get 1 free copy of your credit file each year. This will help keep you aware of any negative listings you might be able to fight against using a credit repair service.
2. Take steps to settle any outstanding debts
New lenders will want to know what you’ve done to address your past credit mishaps, so ensure that any defaults are paid and you do the right thing by your previous creditors.
3. See if a credit repair service can help you
Some bad credit listings, if placed on your file without proper adherence to the relevant laws, can be removed from your file. A credit repair specialist can help you in this regard. Removing negative listings from your credit file can help you apply for a regular home loan, avoiding the higher fees and interest rates of a bad credit home loan.
4. Apply for a loan with a specialist lender who looks beyond the numbers
Certain lenders specialize in bad credit mortgages. These lenders look at your credit file and take into account that bad credit can be a result of a lifestyle change, such as divorce or illness, and will take into account your income and other factors to still grant you a loan, even if you’re a discharged bankrupt or have negative listings on your file. You can leverage your employment history and your record of receiving a steady income to help your case.
5. Don’t apply for too many loans in one space of time
Your credit file includes all previous inquiries for credit, which includes past loan applications. Be careful who you apply for a mortgage with if you already have bad credit. Too many inquiries in the same space of time can present another red flag to prospective lenders.
6. Tell your lender about your bad credit listings honestly
As with every lender, a non-conforming lender will look at all the red flags in your credit history. However, they will also ask for an explanation regarding each entry, and you will have to be thorough in the details you provide. If you try to hide something, you won’t improve your credit rating. You will simply make the lender more suspicious. This may lead to your application being declined on the grounds that you were not being transparent enough or fully honest about your circumstances.
7. Avoid applying with a spouse who has bad credit if you can
If your partner is the one with bad credit, sometimes you can avoid rejection and the higher interest rates of a bad credit loan by applying as a single applicant. Just keep in mind that applying solo will reduce your borrowing power.
8. Eliminate your other debts to make your file look better
When your lender looks at your application, they’ll take into account all of your current credit accounts, including credit cards and personal loans. If you can pay these off and close them before applying it’ll be one less factor that will work against you when your lender decides whether to approve or reject you.
What fees will I pay on a mortgage?
Fees vary by bank and loan, but common fees come down to establishing your risk as a borrower, your potential property’s value and the costs of transferring ownership of your new home.
Fee
Cost
Fee description
Land transfer tax
0.5% – 2%
This is to cover the costs of transferring the property to your name.
Legal fees
Minimum of $500
This fee covers the costs of signing and submitting documents via your lawyer.
Title insurance
$100 – $300
This protects against losses in the event of a property ownership dispute.
Home inspection fees
$200 – $400
A home inspection can help determine a fair price for the home and notify the potential buyer of any problems.
Property appraisal
$300 – $500
An appraisal will be done to determine the value of the property. Many lenders will cover this cost, so be sure to ask when comparing mortgage offers.
Disbursements
$500 – $1,200
Little expenses are included under this like title fees, registration fees and more.
Insurance
Varies depending on the price of your home.
You’ll pay mortgage insurance if you put down less than a 20% down payment. PST on the mortgage insurance must be paid at the time of closing.
No matter your down payment, you’ll need home insurance, which is a separate type of insurance that will protect your home in the case of fires, water damage and more.
How does a second mortgage work?
A second mortgage is a loan taken out on a property on which you already have a mortgage. While this allows you to access additional funds, it may not be a suitable financial solution for all borrowers. Before you decide to take out a second mortgage, make sure you understand how they work, what they’re best used for, and the process involved in getting one.
If you’re already paying off a mortgage on a property, taking out a second mortgage involves applying for another loan with the same property as security.
The second mortgage is ranked behind your first mortgage, which means that if you don’t repay your debt and your property is sold, your first mortgage will be repaid before your second. This is one of the reasons why second mortgages are harder to find than traditional mortgages.
For example, let’s assume you have a mortgage for $200,000 secured on your home with Lender A and you apply for a second mortgage of $200,000 on the same home with Lender B. If you couldn’t pay back the loans and the property was then sold for $380,000, Lender A would be repaid in full and Lender B would only receive the amount that was left over, which would be short of what you borrowed.
Keep in mind that in order to qualify for a second mortgage, you must seek permission from your existing lender.
Why should I take out a second mortgage?
For the majority of borrowers, refinancing their existing loan with another lender offers a less risky option as it allows them to access a higher amount. In certain cases taking out a second mortgage can be beneficial.
For example, if you want to access some of the equity in your home but your existing lender has refused your request for a larger loan amount, a second mortgage could be a viable option. This could also be the case if your first mortgage is a fixed rate home loan — not only will you need to worry about expensive exit fees if you refinance, but the fixed rate you have locked in may be substantially better than the current variable rate available.
Another common situation where a second mortgage can be helpful is where you are guaranteeing a loan for someone else, such as if you’re using your home as security for your child’s home loan. In this case, the second mortgage provides added security for the bank, allowing them to recoup their losses in the event that your child defaults on the loan.
How much can I borrow?
While it’s unlikely that you can borrow the full amount of equity in your home, how much you can borrow will depend on your home’s total value; your loan to valuation ratio (LVR), which is shows the percentage of your home that’s mortgaged; and your credit score.
Is it difficult to qualify for a second mortgage?
The majority of lenders will either place tight limits on the amount you can borrow but there are lenders who can help you if you need a second mortgage, so contact a trusted mortgage broker for assistance.
If you want to take out a second mortgage, you’ll need to get approval from the lender that financed your first mortgage. You’ll typically need to pay a fee of a few hundred dollars to get the first lender to assess your request.
If you’re taking out a second mortgage with the same lender that offered your first mortgage, you may be able to borrow up to 95% LVR (loan to valuation ratio). Meanwhile, borrowers taking out a second mortgage with a different lender may be able to access a loan with up to 85% LVR allowed.
How to apply for a mortgage
While other factors might affect the mortgage process, such as the type of loan, these are generally the steps borrowers take when buying a home:
Find a lender. Shop around until you find a lender and loan that works for you.
Apply for your loan. Provide the required information for a lender to assess your risk, and wait for a loan officer to review your details. An underwriter reviews your application and credit report.
Schedule an appraisal. While not always part of the process, some lenders will require an appraisal on the property you want to purchase. Some lenders pay for this, while others will pass on the cost to the borrower.
Review your loan estimate. Carefully consider the details in your estimate before signing for approval.
Finalize and close the sale. Before your closing meeting, you’ll receive a closing disclosure that lists the fees and costs you’re required to pay. If everything looks in order, you can sign the documents. On closing day, the funds you agreed to borrow will be given to the seller and you will get the keys to your new home.
Buying a house is a biggest investment. Set yourself up for long-term success by comparing mortgages, narrowing down the type of mortgage and finding an interest rate that fits your needs, budget and lifestyle goals. A good interest rate and term can provide peace of mind and save you thousands of dollars over the life of your mortgage.
A-Z list of mortgage lender reviews
Whether you’re in the market for a new home, an investment property or even a recreational property, you’ll find no lack of potential mortgage lenders competing for your business.
We regularly review many of the top mortgage providers on the market, from your local bank or credit union to online lenders and brokers, weighing their rates and terms against other important factors to build a full picture of what you can expect as a borrower.
A strong credit score of 650 or higher can result in more favourable rates and terms on your mortgage. Lenders consider your credit score, income, assets, liabilities and financial history when determining how much money you can borrow, as well as the type of mortgage you're eligible for, your rate and other costs associated with your mortgage. Read our guide to credit scores for more.
To get a conventional mortgage, you'll need a down payment of at least 20%. Putting down less than 20% means you'll need an insured mortgage – which will increase the amount you pay for your home. Insurance rates are lumped into your monthly mortgage payment or can be paid in a lump sum, with rates sitting between 1.80% to 4%. The rate you're charged will depend on how much you put as a down payment.
You can no longer purchase a home over $500,000 with a 5% down payment. New down payment rules are as follows:
If the purchase price of a property is less than $500,000, the minimum down payment is 5%.
If the purchase price is between $500,000 – $999,999, the minimum down payment is 5% on the first $500,000 and 10% on any amount over $500,000.
If the purchase price is $1,000,000 or more, the minimum down payment is 20%.
If you put down less than 20% on your house, mortgage insurance is required by law.
Yes, with many lenders you can lock in an interest rate until you've found the perfect house and are ready to buy. Locking in your rate protects you against rate increases for a specified period of time – usually 90 to 120 days –which gives you time to find and purchase a home and reap the rewards of the locked in rate. But it also means you might be locked in at a higher rate with that lender if the market softens.
Simply put, the prime rate, also known as the prime lending rate, is the interest rate that Canada's major banks use to set interest rates for variable loans and lines of credit. Most banks adjust their prime rate when the Bank of Canada change their overnight lending rate.
When you take out a mortgage, you agree to pay principal and interest over the life of the loan. The amortization period is the agreed number of years that it will take for you to pay off your mortgage in full. This includes both the principal amount and any interest. Amortization periods in Canada typically range from 5- to 35- years, with a 25- year amortization period being the most common. Because your interest rate is applied to the balance, as you pay down your balance, the amount you pay in interest changes over time. Amortization ensures your monthly payment doesn't change over the life of your mortgage.
At the beginning of your loan, a hefty percentage of your payment is applied to interest. With each subsequent payment, you pay more toward your balance.
Let's say you're repaying a 30-year mortgage for $400,000 at 4.5% interest. According to your mortgage's amortization schedule, your first payment is $2,027. But amortization means that payment allocates $1,500 to interest and only $527 to the principal. By the time you make your last payment, you're paying only $8 in interest and $2,019 toward the balance.
The amortization period is the total number of years you have to pay off your mortgage. Amortization periods sit between 5- to 35- years, with 25- years being the most common length.
A loan term is the number of months or years you and your lender have agreed to fix your interest rate for. Lenders typically allow you to keep your interest rate fixed for six months to ten years. Once your loan term matures, you will need to refinance your mortgage. Your lender will typically send you a new interest rate offer and loan term length, which you can either agree to, try to negotiate or simply walk away and refinance your mortgage with a completely different lender.
Yes. If you can, talk to 2 or 3 lenders, so you can compare their interest rates and loan options. But it's best to apply within the same 45-day window so all credit checks count as one inquiry on your report, which can protect your score from dropping too much.
The sooner you get all the necessary documents to your lender, the sooner you'll get your pre-approval letter. This process can take anywhere from a few minutes to a few days, depending on your situation and how quickly you can supply the requested documents.
Romana King is the Canada Group Editor at Finder and a personal finance expert. As an award-winning personal finance writer and real estate expert, she has spent almost two decades helping Canadians make smarter money management decisions. Her first book, House Poor No More: 9 Steps That Grow the Value of Your Home and Net Worth, launched in November 2021, continues to be an Amazon bestseller and won the Excellence in Financial Journalism Book Award in 2022.
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