While a five-year fixed rate mortgage may be the most popular type of mortgage in Canada, there are certainly many options. Some things to consider when deciding on the best choice include loan terms, loan flexibility, and interest rate—among others.
Which type of mortgage in Canada will work best for you will depend on your financial health and lender assessment criteria. How is your credit score? How much of a down payment can you afford up front?
Here is everything you need to know about the types of mortgage in Canada, the options available to you, what criteria you need to qualify—and more. For the mortgage professionals who typically visit our site, this is an excellent resource for you to pass on to clients who have questions about the types of mortgage that they can access in Canada.
There are several different types of mortgages in Canada. The different mortgages include options to avoid lenders charging penalty fees for breaking your contract or paying penalty fees for paying your home loan off early. Unless you plan to own your house until it is repaid in full, you may require flexibility.
The different kinds of mortgages in Canada include the following:
- Open mortgages
- Closed mortgages
- Portable mortgages
- Assumable mortgages
Let’s take a closer look at the types of mortgages in Canada:
1. Open mortgages
There are several differences between open and closed mortgages, namely the flexibility you have in making extra mortgage payments to repay the loan completely. Keep in mind, however, there may be downsides to paying off your mortgage early. For open mortgages, the interest rate is often higher compared to closed mortgages with a similar term length, allowing for greater flexibility if you want to make extra mortgage payments.
An open mortgage could be a good option if you want to:
- Pay off your mortgage soon
- Sell your home soon
- Put extra money toward a mortgage payment from time to time
2. Closed mortgages
For closed mortgages, interest rates are typically lower compared to an open mortgage with a similar term length. Closed term mortgages limit the amount of extra funds you can put toward repaying your mortgage every year. Called a prepayment privilege, it is included in your mortgage contract. However, not all closed mortgages close all prepayment privileges, with the option varying between lenders.
A closed mortgage could be a good option if you want to:
- Keep your home for the remainder of your loan term
- Have the prepayment privileges give you enough flexibility for the prepayments you want to make
3. Portable mortgages
A portable mortgage allows you to transfer your current mortgage if you sell your property to purchase another one. This includes the transfer of the interest rate, terms and conditions, and mortgage balance. A portable mortgage might be a good option for you if:
- You have good terms on your current mortgage
- You want to avoid prepayment penalties for breaking your contract
But make sure you do your research, because you may end up paying a prepayment penalty if your new property costs less than the amount you owe on your home loan, for instance.
If you need help figuring this out, be sure to speak to the best mortgage specialists in your area for help.
4. Assumable mortgages
An assumable mortgage allows you to assume someone else’s home loan and their home. The reverse also works: someone else can assume your mortgage and your home. In either case, the terms of the initial mortgage must remain the same.
An assumable mortgage might be a good option for you if:
- You are a home buyer and interest rates have increased since you initially got your mortgage
- You are a seller and plan to move into a less expensive property, but want to avoid prepayment fees due to the years you have left on your loan term
Typically, fixed-rate mortgages can be assumed, while variable-rate mortgages and home equity lines of credit usually cannot. First, the lender must okay the buyer who wants to assume the mortgage. If the lender approves, the buyer then takes over the remaining mortgage payments, as well as the terms and conditions in the contract.
Once again, it is important to do your research. In some provinces, the seller might continue to be personally liable for the assumable mortgage after the home is sold. In other words, if the buyer cannot make their payments, the lender could ask the seller to come up with the cash.
The most popular mortgage in Canada is the five-year fixed rate mortgage. According to Wowa, there was $1.4 trillion in outstanding residential mortgages as of May 2022. Five-year fixed rate mortgages made up more than $624 billion of that figure—which equals 44% of all mortgages in Canada.
Five-year fixed rate mortgages alone outnumber all variable rate mortgages combined. In fact, five-year fixed rate mortgages are so popular that the Canada Mortgage and Housing Corporation (CMHC) uses the Bank of Canada’s (BoC) five-year benchmark posted rate for its mortgage stress test.
What is a fixed-rate mortgage?
A fixed-rate mortgage means that your mortgage rate will remain the same until your mortgage term is completed. Here’s when most people use them:
- If you think mortgage rates will increase in the short term, you can choose a fixed-rate mortgage for a long-term length, such as 10 years.
- If you think mortgage rates will remain the same or decrease, you may want to go with a shorter-term length.
But beware, there are both pros and cons to choosing a shorter-term mortgage.
The most common mortgage term in Canada is a shorter-term mortgage, usually five years or less. With a shorter-term mortgage, you must renew your mortgage contract more quickly. However, you do have options, such as:
- Choosing between a fixed or a variable interest rate
- Taking advantage of lower interest rates when you sign up
There are, however, other mortgage terms that you can choose from, which include:
- Longer-term mortgage
- Convertible-term mortgage
Here is a closer look at each so we can better understand the distinctions:
Typically, longer-term mortgages have a term more than five years. The longer the mortgage term, the longer you keep the conditions of your mortgage contract. A few things to note for longer-term mortgages are:
- Potentially restricted to a fixed interest rate
- Offer lock-in interest rate for a longer period
- Cost a substantial prepayment penalty if you sell your property with the first five years of your loan term
A convertible-term mortgage means that you may have the option to extend a shorter-term option to a longer term. After your mortgage has been extended or converted, your interest rate will change. Usually, your new interest rate will be the one offered by the lender for the longer-term mortgage.
It is a common misconception that there is no 30-year mortgage in Canada—there are indeed 30-year mortgages offered in Canada. The difference from other mortgage terms is that you must make a down payment of at least 20% to get a 30-year mortgage in Canada.
What is a 30-year mortgage in Canada?
A 30-year mortgage in Canada is a type of mortgage that has an amortization period of 30 years, meaning your monthly mortgage payments will be spread out over that entire time. A portion of those payments goes toward paying off the loan principal and a portion goes towards paying interest. The longer the amortization period of your mortgage, the smaller each of your payments must be.
A 30-year mortgage is longer than normal; most mortgages in Canada have an amortization of 25 years, which is a requirement by the CMHC for mortgages with private mortgage insurance (PMI) on them.
A good credit score to get a mortgage in Canada is anything above 660, meaning that your risk for defaulting on your mortgage is low and you are a safe candidate for a home loan. In Canada, credit scores range from poor (300) to excellent (900). The higher your credit score, the better your chances of securing a mortgage, since it can:
- Secure approval
- Secure a good interest rate
While it varies by lender and mortgage type, the minimum credit score you need to get a traditional mortgage is about 680. While there are lenders that will go lower, generally higher is better. A credit score higher than 700, for instance, is the best-case scenario when applying for a mortgage.
When reviewing your credit score to get a mortgage in Canada, it is important to know the various factors that can impact credit scores, such as:
- Credit history: It is more advantageous to have your credit accounts for longer periods.
- Types of credit: Having a mix of different types of credit is the best, such as a line of credit and a credit card.
- Payment history: Paying your credit card bills on time is a great way to build up a good credit score.
- Credit utilization: Ideally, you would use less than 35% of your available credit.
- New credit requests: This means the frequency with which you apply for new credit cards and new loans. Requesting too often may impact your credit score.
If you would like to know more about your own credit score, you can pull it from one of the two credit-reporting agencies in Canada, which are TransUnion or Equifax Canada. You can either request a copy of your credit score for free each year or look it up at any time for a small fee.
It is not necessarily hard to qualify for a mortgage in Canada—you just need to ensure you are ready for the financial commitment and that you meet certain lender criteria. Here is a quick checklist that lenders use to determine whether you are financially ready for a mortgage:
- Your income, credit score, and down payment
- Your income stability and your debt service ratio
- Your credit score—which must be higher than 600
- Your down payment—which can be as low as 5%
- If you can’t meet these criteria, there are options such as private mortgage lenders
There are plenty of mortgage options in Canada. If you can make a down payment of 20%, you may qualify for a 30-year mortgage. If not, the most popular mortgage in Canada—a five-year fixed rate mortgage—may be the best option for you.
Before committing to a type of mortgage, it is important to understand the possible long-term implications. Does it make sense for your financial goals? By considering both the short- and long-term, you will have chosen the right type of mortgage for your home in no time.
Do you have experience with the different types of mortgage in Canada? Let us know in the comment section below.