Getting a mortgage

A mortgage is a loan used to buy a home or other property. The lender provides part (often most) of the purchase price of the property. The lender is usually a bank or credit union, but could be a loan company or private individual. The borrower promises to pay the lender back, plus interest. 

Under the law in BC, a mortgage gives the lender a charge — meaning an interest or a right — against the property being purchased. That charge gives the lender rights if the borrower defaults on the mortgage. The most common way for a borrower to default is by not making payments under the mortgage as promised. 

If you default on your mortgage, the lender can go to court to take the property or sell it to pay the mortgage debt. This process is called foreclosure. In a foreclosure, the lender cares about getting its money back. They don’t care about getting fair market value for the property or what might be left over for you. It’s important to take quick action if you’re having difficulties paying your mortgage or if you’re facing foreclosure.

As the borrower, you will be asked to sign a mortgage contract. This document sets out the terms and conditions for the loan and its repayment. 

The mortgage contract will include:

• the principal amount lent to you

• the interest rate at which the money is lent

• the payments you must make

• the frequency of the payments, which can be weekly, bi-weekly or monthly

The key promises the borrower makes in any mortgage contract are to: 

• make payments under the mortgage on time 

• give the property as security in case of default

In most mortgages, the borrower also promises to: 

• pay the property taxes

• keep the property in good repair

• insure buildings on the property against fire and other risks

Most lenders insist on using their own standard mortgage contract, with few variations. But there are typically a few items that can be negotiated. These include the mortgage term, prepayment rights, and whether the mortgage can be transferred if you sell the property. More on these in a moment.

The lender must give you a copy of the mortgage contract when the mortgage is signed. 

Two time periods are relevant to most mortgages: the “amortization” period and the “term” of the mortgage. 

The amortization period refers to the length of time to pay off the whole mortgage. A typical amortization period for a new mortgage is 25 years. 

The mortgage term is the length of time you commit to a specific lender, interest rate, and terms and conditions. Usually, mortgage terms range between six months and five years. The term acts like a “reset” button on a mortgage. When the term is up, you must renew your mortgage on the remaining principal. The renewal might have a new interest rate and terms and conditions.

Deciding on the length of term you want will depend partly on whether you think interest rates will go up or down. If you think rates will go up, a longer term is to your advantage. If you think rates will go down, that will favour a shorter term. 

“My wife and I wanted the flexibility to sell our home before the term of our mortgage ends. That’s why we asked our bank for an open mortgage. It’s nice to know that we’ll be able to pay out the mortgage whenever we can without facing a penalty.”

– Justin, Kelowna, BC

Putting extra money toward your mortgage is called making a prepayment. Prepayments allow you to pay down your mortgage faster or pay off your mortgage before the end of the term. This can save you money and give you more flexibility. 

Prepayment terms vary from lender to lender. One of the most important aspects of getting a mortgage is getting prepayment terms that meet your needs.

In an open mortgage, the borrower can make extra payments or pay out the mortgage at any time during the term of the mortgage (without penalty). 

A closed mortgage has restrictions on making extra payments or paying out the mortgage early. Some closed mortgages don’t allow any prepayments unless you pay a large penalty. Other closed mortgages allow partial prepayments. For example, the lender may allow you to prepay 10 percent of the balance owing each year without penalty.

So why wouldn’t everyone get an open mortgage? Because they come at a higher interest rate. You pay for that flexibility. 

If someone wants to sell a property with a mortgage on it, there are two options:

• they pay the remaining amount on the mortgage before they sell

• the buyer takes over responsibility for the mortgage

The second case is called an assumable mortgage. 

With an assumable mortgage, a buyer can agree to take on the remaining debt on the mortgage, rather than getting a new mortgage. 

This can be an attractive option when interest rates are rising. For example, let’s say you’re selling your property, and the interest rate on your mortgage is 5%. But market interest rates are currently 7%. A buyer might prefer to assume that lower-rate mortgage rather than get a new one.  

Lenders will usually require you to make a down payment of at least 5% to 10% of the purchase price of a property. The mortgage loan covers the rest of the price of the property.

If your down payment is less than 20% of the price of the property, you’ll need to purchase mortgage loan insurance. This insurance, also called mortgage default insurance, protects lenders in case you stop making regular payments under the mortgage. 

For information on whether you qualify for mortgage loan insurance, see the Canada Mortgage and Housing Corporation website.

Before you start shopping around for a mortgage, order a copy of your credit report. Here, we explain how. Make sure your credit report doesn’t contain any errors. (If it does, here’s how to fix errors on it.) A potential lender will look at your credit report before approving you for a mortgage.

If you don’t have a good credit score, the mortgage lender may:

• refuse to approve your mortgage

• decide to approve it for a lower amount or at a higher interest rate

• only consider your application if you have a large down payment

• require that someone co-sign the mortgage loan with you

In pre-approving you, a mortgage lender looks at your finances to find out the maximum amount they will lend you and what interest rate they will charge you.

With a pre-approval, you can know the maximum amount of a mortgage you could qualify for. You may also be able to lock in an interest rate for 60 to 120 days, depending on the lender.

Learn more about the pre-approval process.

Visit different lenders to discuss the terms they are willing to offer.

Ask about:

• the interest rate

• the mortgage term

• the fees you have to pay

• what happens if you want to make prepayments on the mortgage 

• what happens if you want to pay your entire mortgage off early

• what happens if you sell your property before the end of your term

• transferring the remaining amount of your mortgage and the terms to a new property 

Once a lender decides to lend you money, you’ll have to negotiate the terms and conditions of the mortgage, such as:

• the interest rate

• the amortization period

• the mortgage term

• how often you'll make payments

• if it's an open mortgage or closed mortgage

• if it’s an assumable mortgage  

See above, under what you should know, for things to watch out for in these negotiations.

Read your mortgage contract carefully and be sure to ask about anything you don't understand.

The amortization period is the length of time to pay off the whole mortgage. A typical amortization period for a new mortgage is 25 years. This keeps the regular payments relatively low. However, it means paying more interest. Mortgages with short amortization periods have higher regular payments but charge less total interest. 

The mortgage term is the length of time you commit to a specific lender, interest rate, and terms and conditions. Usually, mortgage terms range between six months and five years.

Because interest rates change often, locking into a long-term mortgage is a gamble on both sides. Lenders usually won’t agree to lend at the same rate for the whole amortization period. Rather, they’ll lend you money for a shorter term and then renew the agreement at a rate that reflects the new market conditions.

Say you enter into a mortgage with a 25-year amortization period and a two-year term at 3.5%. At the end of the two-year term, benchmark interest rates are up. The lender might then offer to renew your mortgage for another two-year term, this time at 5%. 

If the bank turns down your application for a mortgage, you might consider taking out a private mortgage. Private mortgages are easier to qualify for than mortgages from a traditional lender. 

You might get a private mortgage from someone you know, like a friend or relative. This can be faster and cheaper than getting a mortgage from a bank. You may pay a lower interest rate. And the lender’s getting something in return: a fair rate will still earn them more than that money would make sitting in a savings account. But the arrangement is not without its own risks. See our guidance on borrowing from a friend or relative.

Or, you might get a private mortgage from a private lender you don’t know personally. These are known as “hard-money” lenders because they usually require collateral to secure the loan. These lenders are mostly concerned with the value of the assets you put up as security.  

Hard-money lenders usually charge a higher interest rate than traditional lenders. As well, the loans are typically for shorter amortization periods, such as one to five years.