Understanding Mortgages in Canada

Purchasing a first home is a major milestone, and understanding mortgage options is essential for making informed, confident decisions. Whether exploring new builds in Calgary’s growing communities or considering resale homes, the type of mortgage selected can influence monthly payments, long-term costs, and overall financial flexibility.

This guide breaks down the most common mortgage types in Canada, including fixed and variable rates, CMHC insurance, amortization periods, and other key terms every first-time homebuyer should be familiar with.

What is a Mortgage?

A mortgage refers to a loan that is used to purchase a home or piece of land. The borrower agrees to pay back the lender over a pre-determined amount of time by a series of regular payments with interest. In order to qualify for a mortgage at any bank in Canada, you will need to pass the government enforced stress test. The reasoning behind this stress test is to ensure that homeowners can afford the necessary payments at the qualifying interest rate.

Pre-Approval

Before beginning the home search, it is recommended that prospective buyers visit a bank or consult a mortgage broker to begin the pre-approval process. A mortgage pre-approval provides a clear understanding of the maximum loan amount a buyer may qualify for. This amount depends on several factors, including the size of the down payment, existing debt, and whether the buyer is selling another property.

To obtain pre-approval, the lender will require personal identification, employment records (such as T4 slips or notices of assessment from the CRA), a credit report and history, details of any outstanding debts, monthly expenses, and information on owned assets like vehicles.

It’s important to note that pre-approval is not a guaranteed mortgage approval. Final approval is required to complete the purchase.

Down Payment

The down payment is the initial amount paid toward the purchase of a home. Common sources include personal savings, RRSP withdrawals, non-repayable gifts, proceeds from the sale of another property, or funds borrowed against proven assets. Typically, a minimum of 5% of the purchase price is required to be put down on a home worth $500,000 or less, and 10% is required to be put down for anything higher than $500,000. If the down payment is less than 20% of the home’s purchase price, mortgage loan insurance is required.

What Is CMHC Insurance?

CMHC (Canada Mortgage and Housing Corporation) Insurance, also known as mortgage loan insurance, is mandatory for homebuyers who make a down payment of less than 20% of the home’s purchase price. This insurance protects lenders in case of default and enables homebuyers to enter the market with a smaller deposit.

Key Points:

• Required for down payments between 5% and 19.99%
• Minimum down payment varies by home price:
  • For homes priced at $500,000 or less: minimum 5% down
  • For homes over $500,000: 5% on the first $500,000 and 10% on the remainder
  • For homes priced at $1,500,000 or more: CMHC insurance is not available
• Can be added to the mortgage or paid upfront
• The lender arranges the purchase of CMHC insurance

Example: On a $450,000 home with a 5% down payment, CMHC insurance could add approximately $15,000 to the mortgage.

✅ Bonus Insight: CMHC insurance helps make homeownership more accessible for first-time homebuyers, especially in Calgary, where entry-level homes remain relatively affordable compared to other major cities.

Fixed vs. Variable Mortgage Rates

✅ Fixed-Rate Mortgages

A fixed-rate mortgage secures the interest rate for a specific term—usually between 1 to 5 years. Regardless of changes in prime interest rates, the mortgage rate remains locked in, ensuring consistent monthly payments and financial predictability.

Best suited for: Homebuyers seeking stability and protection from interest rate fluctuations.

Pros:

• Predictable monthly payments
• Easier budgeting
• Shielded from rising rates

Cons:

• Potentially higher initial rates compared to variable options
• Less flexibility if rates decrease

Variable-Rate Mortgages

Variable-rate mortgages fluctuate based on the lender’s prime rate. This can result in savings when rates are low but also introduces risk if rates increase. The interest rate is typically set a fixed amount above or below the prime rate—such as prime minus 0.55%. While the prime rate may change over time, the spread between the mortgage rate and prime remains constant throughout the term.

Best suited for: Homebuyers comfortable with market changes and seeking potential savings.

Pros:

• Lower initial rates
• Opportunity to save if rates remain low

Cons:

• Payments may rise over time
• Less predictability in long-term costs

Understanding Amortization Periods

The amortization period refers to the total time it will take to pay off the mortgage—typically 25 years for insured mortgages and up to 30 years for uninsured ones.

Shorter Amortization (e.g., 20 years):

• Higher monthly payments
• Less interest paid over time
• Faster path to full ownership

Longer Amortization (e.g., 30 years):

• Lower monthly payments
• More interest paid over time
• Greater flexibility for budgeting

💡 Insight: Many first-time homebuyers opt for a 25-year amortization to balance monthly affordability with long-term savings.

Other Mortgage Terms to Know

• Open vs. Closed Mortgages:
  Open mortgages allow early repayment without penalties, while closed mortgages offer lower rates but limit prepayment options.
• Mortgage Term:
  The length of the current agreement with the lender (e.g., 5 years). At the end of the term, the mortgage is renewed at current market rates.
• Prepayment Privileges:
  Many lenders offer the option to make extra payments annually, helping homebuyers pay off their mortgage faster and reduce interest costs.

Final Thoughts

Understanding mortgage types is crucial for navigating the first home purchase with confidence. From choosing between fixed and variable rates to grasping the role of CMHC insurance, each decision plays a part in shaping a homebuyer’s financial future.

For first-time homebuyers in Calgary, expert guidance is available to help explore mortgage options, connect with trusted lenders, and find a new home that fits both lifestyle and budget.