Buying a home with a loan
A mortgage is a loan to buy property. The home serves as security: if payments aren’t made, the lender can take it.
Key terms
| Term | Meaning |
|---|---|
| Down payment | the part of the price you pay upfront |
| Principal | the amount borrowed |
| Amortization period | total time to repay, commonly 25 years |
| Term | length of the current contract (often 5 years); then you renew |
| Fixed rate | the rate stays the same for the term |
| Variable rate | the rate moves with the lender’s prime rate |
Down payments in Canada
Canada has minimum down payment rules, and if you put down less than 20%, you need mortgage default insurance (from CMHC or a private insurer). The insurance premium is added to the mortgage. Rules change from time to time, so check current requirements.
Example: A $500,000 home with a 10% down payment.
- Down payment: $50,000
- Mortgage: $450,000 (plus insurance premium)
Monthly payments
Mortgage payments use the loan payment formula. Canadian fixed-rate mortgages compound semi-annually by law, which slightly changes the monthly rate. Online calculators handle this.
Approximate example: $400,000 at 5% over 25 years ≈ $2,326/month.
How much interest?
Over 25 years at about $2,326/month: total paid ≈ $698,000. Interest ≈ $298,000, nearly 75% of the original loan!
Ways to pay less interest
| Strategy | Effect |
|---|---|
| larger down payment | smaller loan |
| shorter amortization | higher payments, much less interest |
| accelerated biweekly payments | adds about one extra monthly payment per year |
| lump-sum prepayments | reduces principal directly |
| lower rate | shop around and negotiate |
Example: $400,000 at 5%: 25-year amortization ≈ $2,326/month; 20-year ≈ $2,629/month, saving tens of thousands in interest.
Affordability guidelines
Lenders check that housing costs aren’t too high a share of income, and they run a "stress test" at a higher rate to make sure you could still pay if rates rise.
Extra costs of owning
Property tax, home insurance, utilities, maintenance (often estimated at 1–3% of the home’s value per year), condo fees, land transfer tax and legal fees.
Worked examples
Example 1: $650,000 home, 20% down. Mortgage amount? $520,000 (no default insurance needed).
Example 2: Payments of $2,000/month for 25 years on a $340,000 loan. Total interest? 600,000 − 340,000 = $260,000.
Example 3: Fixed or variable if you want predictable payments? Fixed rate.
Common mistakes
- Confusing the term with the amortization period.
- Forgetting the extra costs of owning.
- Stretching to the maximum mortgage a lender approves.
Try it yourself
- A $350,000 home with 5% down. Down payment?
- Is default insurance needed on a 15% down payment?
- $1,800/month for 25 years on a $300,000 mortgage. Total interest?
- Name one way to reduce mortgage interest.
Answers: 1) $17,500 2) yes (under 20%) 3) $240,000 4) e.g. larger down payment, shorter amortization, extra payments
Quick recap
- A mortgage finances a home; the down payment is upfront.
- The amortization period is the full payoff time; the term is the contract length.
- Choose fixed rate or variable rate; reduce interest with bigger or faster payments.