What Is a Mortgage and How Does It Work?
A mortgage is a loan secured against your property, repaid through a combination of principal (the amount borrowed) and interest (the cost of borrowing). According to CMHC, roughly 75% of Canadian homebuyers finance their purchase with a mortgage. Understanding the basics helps you pay less interest over time and build equity faster.
The best plan for any type of mortgage is to minimize the total interest you pay. That starts with knowing how each piece of your mortgage works, from down payments to amortization to payment frequency. You don’t have to get your mortgage from the same place you keep your savings or chequing account. In fact, working with a mortgage broker gives you access to dozens of lenders competing for your business.
How Much Do You Need for a Down Payment in Canada?
Canada’s minimum down payment rules are set by the federal government and enforced through CMHC mortgage insurance requirements. For homes under $500,000, the minimum is 5%. For the portion between $500,000 and $1,499,999, you need 10%. Properties at $1.5 million or above require 20% (CMHC, 2024).
Here’s how that breaks down for common Alberta purchase prices:
- $350,000 home: 5% = $17,500 minimum down payment
- $500,000 home: 5% = $25,000 minimum down payment
- $650,000 home: 5% on first $500K ($25,000) + 10% on remaining $150K ($15,000) = $40,000
- $1,500,000 home: 20% = $300,000 minimum down payment
A larger down payment reduces your mortgage balance, which means less interest over the life of your loan. If you put down less than 20%, you’ll need mortgage default insurance (commonly called CMHC insurance), which protects the lender if you default. The premium is added to your mortgage balance and can range from 2.8% to 4.0% of the loan amount.
What Is Amortization and Which Period Should You Choose?
Amortization is the total time it takes to repay your mortgage in full. Most Canadian buyers choose a 25-year amortization, though 30-year options are now available for insured mortgages on new builds and for first-time buyers under recent federal changes (Department of Finance Canada, 2024).
A shorter amortization means higher monthly payments but significantly less interest overall. A longer amortization lowers your payments but costs more in the long run.
25-Year vs 30-Year Amortization Example
On a $400,000 mortgage at 5.0%:
- 25-year amortization: ~$2,326/month, total interest ~$297,800
- 30-year amortization: ~$2,138/month, total interest ~$369,700
That’s roughly $72,000 more in interest for the convenience of lower monthly payments. Your mortgage broker can model both scenarios so you see the true cost before you commit.
Fixed Rate or Variable Rate: Which Is Right for You?
Fixed-rate mortgages lock in your interest rate for the entire term, typically 1 to 5 years. Variable-rate mortgages fluctuate with the Bank of Canada overnight lending rate. Historically, variable rates have saved borrowers money over time, but they carry more short-term risk.
Fixed Rate Mortgages
- Predictable payments for the full term
- Protection against rate increases
- Typically higher starting rate than variable
- Penalty to break early is usually an interest rate differential (IRD), which can be costly
Variable Rate Mortgages
- Rate adjusts when the Bank of Canada changes its overnight rate
- Usually starts lower than fixed
- Penalty to break early is typically three months’ interest (less expensive than IRD)
- Best suited for borrowers comfortable with some payment fluctuation
How do you decide? Consider your risk tolerance, how long you plan to stay in the home, and current market conditions. A broker can walk you through rate forecasts and help you weigh the trade-offs.
What Is the Mortgage Stress Test?
Since 2018, all Canadian mortgage applicants must pass the federal mortgage stress test, regardless of down payment size. You qualify at the higher of your actual mortgage rate plus 2%, or the Bank of Canada’s minimum qualifying rate of 5.25% (OSFI, 2024).
This means even if your lender offers you 4.5%, you must prove you can afford payments at 6.5%. The stress test limits how much you can borrow and is designed to protect borrowers from rate increases during their mortgage term.
Your gross debt service (GDS) ratio must stay below 39%, and your total debt service (TDS) ratio below 44%. These ratios measure how much of your income goes toward housing costs and total debt payments.
Many Alberta buyers are surprised to learn that the stress test applies even with 20% or more down. It isn’t just a rule for insured mortgages. Every federally regulated lender must apply it, which is why working with a broker who understands your full financial picture makes a real difference in how much home you qualify for.
How Do Payment Frequencies Reduce Your Interest?
Switching from monthly to accelerated biweekly payments is one of the simplest ways to save thousands on your mortgage. With accelerated biweekly payments, you make 26 half-payments per year, which equals 13 full monthly payments instead of 12 (Financial Consumer Agency of Canada).
Here are the common payment frequency options:
- Monthly: 12 payments per year
- Semi-monthly: 24 payments per year (the monthly amount split in half)
- Biweekly: 26 payments per year (the monthly amount divided by two)
- Accelerated biweekly: 26 payments per year (half the monthly payment, resulting in one extra full payment annually)
- Weekly / Accelerated weekly: 52 payments per year
The accelerated options shave years off your amortization. On a $400,000 mortgage at 5%, accelerated biweekly payments can save you over $30,000 in interest and cut roughly 3 years off a 25-year amortization.
What Are Pre-Payment Privileges and Why Do They Matter?
Most Canadian mortgage contracts include pre-payment privileges that let you pay down your mortgage faster without penalty. Typical privileges include lump-sum payments of 10% to 20% of the original balance per year, plus the option to increase your regular payment by 10% to 20% annually (CMHC).
Taking advantage of these privileges can dramatically reduce your total interest costs. Even small annual lump-sum payments make a noticeable difference. For example, putting a $5,000 tax refund toward your mortgage each year can save tens of thousands over 25 years.
Tips for Using Pre-Payment Privileges
- Review your mortgage contract to know your specific limits
- Time lump-sum payments early in the year so the principal reduction compounds
- Increase your regular payment amount whenever your income rises
- Combine accelerated payment frequency with annual lump sums for maximum impact
Why Work with a Mortgage Broker in Alberta?
Mortgage brokers in Alberta are licensed and regulated by the Real Estate Council of Alberta (RECA). Unlike a bank, which offers only its own products, a broker shops your application across dozens of lenders to find the best rate and terms for your situation.
A broker’s services typically cost you nothing. Lenders pay the broker’s fee when your mortgage funds. You get expert advice, access to more competitive rates, and someone who handles the paperwork and negotiations on your behalf.
Working with a broker is especially valuable if you’re self-employed, have non-traditional income, carry existing debt, or are buying your first home and need guidance on programs like the First Home Savings Account (FHSA) or the Home Buyers’ Plan (HBP).
Frequently Asked Questions
What credit score do I need to get a mortgage in Canada?
Most lenders require a minimum credit score of 600 to 680 for conventional mortgages. For insured mortgages (less than 20% down), the minimum is typically 600. A higher score gives you access to better rates and more lender options. Checking your score through Equifax or TransUnion before applying helps you address any issues early.
Can I get a mortgage if I’m self-employed?
Yes. Self-employed borrowers in Alberta can qualify, though the process requires additional documentation. Lenders typically want to see two years of Notice of Assessments (NOAs), T1 Generals, and business financial statements. Some lenders offer stated-income programs for self-employed applicants with strong credit and a larger down payment.
What is the difference between a mortgage term and amortization?
Your amortization is the total repayment period, usually 25 or 30 years. Your term is the length of your current mortgage contract with a specific lender, typically 1 to 5 years. At the end of each term, you renew your mortgage (often with a new rate) or switch lenders. Most Canadians go through several terms before their mortgage is fully paid off.
How much are closing costs in Alberta?
Budget 1.5% to 4% of the purchase price for closing costs. In Alberta, common costs include legal fees ($1,000 to $2,000), home inspection ($400 to $600), appraisal ($300 to $500), and title insurance. Alberta does not charge a provincial land transfer tax, which saves buyers thousands compared to provinces like Ontario or British Columbia.
