Mortgage features

The features of mortgages vary from one financial institution to another. Consider these features in order to make sure you choose a mortgage that meets your needs.

The term and the amortization period

The mortgage loan term is the term of the mortgage contract, which is usually between six months and five years. The amortization period is the estimated time it will take you to repay your mortgage loan in full. This period is generally between 15 and 25 years. As of August 1, 2024, access to 30-year insured mortgages has been expanded to first-time buyers who are purchasing a new home.

When the term expires, you’ll have a number of options, including renewing your mortgage contract, finding another lender or paying off the loan in full.

A fixed, variable or blended interest rate?

The interest rates posted by financial institutions change over time according to various factors, including the Bank of Canada key interest rate and the interest rates of bonds available on the market.

Bank of Canada key interest rate

The key interest rate This link will open in a new window is the target interest rate at which major financial institutions borrow and lend one-day (or “overnight”) funds among themselves. The Bank of Canada reviews this rate periodically.

Changes in the rate influence other interest rates, such as each financial institution prime rates and interest rates on mortgages.

Financial institution prime rates

Each financial institution sets a prime rate, which it uses to set variable interest rates on mortgages and other loans.

Example: If a financial institution sets its prime rate at 3.5% and charges you its prime rate minus one percent (prime - 1%), you’ll pay 2.5%.

Note: The prime rate applies to all the financial institution’s customers, but a different formula is used depending on the customer’s credit report and negotiating power.

Fixed rate mortgage loan

The applicable interest rate remains the same for the entire term of the loan. For example, if you choose a 5-year fixed rate mortgage, your interest rate will remain the same for five years. With this type of mortgage, you will therefore know how much your mortgage payments will be, and those payments won’t change even if interest rates on new mortgages do. You can choose the length of the term; however, if market rates go down during that time, you won’t benefit from the decrease unless you’re coming to the end of your mortgage.

This type of interest rate could be right for you if:

  • you think interest rates will go up
  • you don’t want any uncertainty about the interest rate you’ll be paying
  • you don’t have enough money in your budget to handle fluctuations in the payment amount

Variable interest rate

Variable rate mortgage

Variable interest rates fluctuate over time, going either up or down. The effect of a rate increase or decrease will depend on the type of loan contract you choose.

For a variable rate, variable payment mortgage

The term of the loan will remain fixed. When interest rates go down, so will your mortgage payments. When interest rates go up, your mortgage payments will also go up.

Use our calculator to estimate what the payments would be following a change in interest rates.

For a variable rate, fixed payment mortgage

When interest rates go down:

You will continue to make the same payments. You will pay off your loan faster because a smaller portion of your payment will be used to pay down interest on your loan.

When interest rates go up:

You will continue to make the same payments. However, you will pay off your loan more slowly because a larger portion of your payment will be used to pay the interest on your loan. This will lengthen the duration of your mortgage loan. In order to pay off your mortgage within the expected time period (e.g., 25 years), you may have to increase your payment amount.

Important: The lender may require you to increase your payment amount even if you’ve chosen fixed payments.

Depending on the loan contract, this may occur, in particular, if the periodic payment is no longer sufficient to cover the interest on the loan. This is called the trigger point.

The following table shows the bi-weekly payments required to cover the loan interest. For example, in the case of a $400,000 mortgage with an interest rate of 5.5%, the minimum bi-weekly payment required to pay the periodic interest on the loan is $835.60. This amount covers just the interest; it does not bring down the loan balance.

What is the minimum bi-weekly payment required to pay at least the interest on a variable rate, fixed payment mortgage?
 

Interest rate paid

$100,000 loan balance

$200,000 loan balance

$300,000 loan balance

$400,000 loan balance

$500,000 loan balance

$600,000 loan balance

1.50%

$57.49

$114.99

$172.48

$229.97

$287.47

$344.96

1.75%

$67.04

$134.07

$201.11

$268.15

$335.19

$402.22

2.00%

$76.57

$153.14

$229.71

$306.28

$382.85

$459.42

2.25%

$86.09

$172.18

$258.28

$344.37

$430.46

$516.55

2.50%

$95.60

$191.21

$286.81

$382.41

$478.02

$573.62

2.75%

$105.10

$210.21

$315.31

$420.42

$525.52

$630.62

3.00%

$114.59

$229.19

$343.78

$458.37

$572.97

$687.56

3.25%

$124.07

$248.14

$372.22

$496.29

$620.36

$744.43

3.50%

$133.54

$267.08

$400.62$

$534.16

$667.70

$801.24

3.75%

$143.00

$285.99

$428.99

$571.99

$714.99

$857.98

4.00%

$152.44

$304.89

$457.33

$609.78

$762.22

$914.66

4.25%

$161.88

$323.76

$485.64

$647.52

$809.40

$971.28

4.50%

$171.31

$342.61

$513.92

$685.22

$856.53

$1,027.83

4.75%

$180.72

$361.44

$542.16

$722.88

$903.60

$1,084.32

5.00%

$190.12

$380.25

$570.37

$760.49

$950.62

$1,140.74

5.25%

$199.52

$399.03

$598.55

$798.07

$997.59

$1,197.10

5.50%

$208.90

$417.80

$626.70

$835.60

$1,044.50

$1,253.40

5.75%

$218.27

$436.54

$654.82

$873.09

$1,091.36

$1,309.63

6.00%

$227.63

$455.27

$682.90

$910.54

$1,138.17

$1,365.80

6.25%

$236.99

$473.97

$710.96

$947.94

$1,184.93

$1,421.91

6.50%

$246.33

$492.65

$738.98

$985.31

$1,231.63

$1,477.96

6.75%

$255.66

$511.31

$766.97

$1,022.63

$1,278.28

$1,533.94

7.00%

$264.98

$529.95

$794.93

$1,059.91

$1,324.88

$1,589.86

7.25%

$274.29

$548.57

$822.86

$1,097.15

$1,371.43

$1,645.72

7.50%

$283.59

$567.17

$850.76

$1,134.34

$1,417.93

$1,701.51

7.75%

$292.87

$585.75

$878.62

$1,171.50

$1,464.37

$1,757.25

8.00%

$302.15

$604.31

$906.46

$1,208.61

$1,510.77

$1,812.92$

Don’t wait until you get a call from the lender to take action

Usually, you can increase your payments by a certain amount without incurring a penalty. Check your contract for the applicable limits. The sooner you increase the amount of your payments, the more principal you will pay down. This means you will pay off your loan faster and pay less interest.

By increasing your payments as soon as possible, you will also reduce the amount by which the interest rate will increase on renewal your loan contract. In fact, if the interest rate goes up and you don’t increase your payments, you’ll pay down less principal than you thought you would when you signed the loan contract. On renewal, your loan balance will be higher than initially anticipated. Therefore, in order to pay off your loan within the time period contemplated when you signed the contract, you will have to increase your payments.

With interest rates on the rise, if you have this type of loan, it’s best to contact your lender sooner rather than later to assess your options.

Switch from a variable rate mortgage to a fixed rate mortgage

Some lenders may allow you to switch from a variable rate mortgage to a fixed rate mortgage amid rising or falling interest rates. Find out what conditions apply.

If the interest rate on your variable rate mortgage goes up and you’re worried about further rate increases, you can switch your variable rate mortgage for a fixed rate mortgage; however, because interest rates have gone up, you’ll likely get a higher rate than the one you got when you initially took out the mortgage.
You may also want to switch from a variable rate to a fixed rate mortgage when the interest rate goes down, in which case you may want to find out first whether the rate you would be offered would be the fixed rate posted by the financial institution or a lower one.

If you choose a variable rate mortgage, the rate won’t be guaranteed, but the formula for calculating the rate may be.

For example, you may be granted the financial institution’s prime rate minus 1% if:

  • The prime rate is 3.5%, you’ll pay 2.5% interest (3.5% - 1% = 2.5%)
  • The prime rate increases to 6%, you’ll pay 5% interest (6% - 1% = 5%)

Blended interest rate

  1. Capped variable rate mortgage (protected)
    The interest rate fluctuates with the market rates but won’t exceed a predetermined threshold for the duration of the term.
  2. Instalment interest rate mortgage
    You divide your mortgage up into instalments. Each instalment has its own features, such as its own amortization period, term and interest rate. Doing this could, for example, allow you to expose a portion of your mortgage to the advantages of a variable rate and to keep the other portion of your loan secure with a fixed interest rate.

Closed, open or convertible mortgage

Whether you have a fixed rate or variable rate mortgage, there are other factors to consider:

Closed mortgage

The number and amount of your mortgage payments are set. You can’t pay back a larger amount than what is specified in the contract.

Prepayment options

Some contracts offer you the option of increasing your payments up to a set limit. Contracts differ greatly on this point: some may allow you to increase your payments by as much as 15%, while others may let you double your payments if you want.

Some contracts also offer you the option of prepaying a portion of the loan each year. However, there are limits on how much you can prepay, and if you exceed them, the penalties can be quite high. Financial institutions generally limit such prepayments to between 10% and 25% of the initial borrowed amount.

Open mortgage

You can repay some or all of this type of loan whenever you want without any penalty. You can also renegotiate it before the term is up. In order to be able to offer this kind of flexibility, an open mortgage may sometimes have a higher interest rate than a closed mortgage. Before choosing this kind of mortgage, compare the rate with the rate for a closed mortgage. Make sure that the difference in rates is worth it, because the cost can be high.

Convertible mortgage

This type of loan allows you to renegotiate the interest rate before the end of the term and to choose a longer term. For example, you could have a convertible mortgage with a fixed interest rate for six months and then convert it when you want a mortgage with a longer term.

Fee reimbursements and other perks

Many financial institutions offer perks. Some will offer to reimburse the notary or property appraisal fees or give you cash back or interest rebates, for example. Negotiate and properly estimate the value of these perks. For example, will the interest rate charged in return for them be higher than what is charged by other lenders?

Transferable mortgage

This option could allow you to keep your loan if you move and thereby avoid penalties. Some financial institutions also let the seller of a property transfer the loan to the buyer under certain conditions. You may have to pay administrative and legal fees.

Penalties for breaking a mortgage

Financial institutions usually charge penalties for breaking a closed mortgage early. These penalties can be very high. The reasons why you might want to break a mortgage early are as many as they are varied and include: separating from your spouse, experiencing a cut or increase in your income, having children (or, on the other end, becoming an empty-nester), having to relocate for a new job, or wanting to benefit from a drop in interest rates on new mortgages or live in a smaller, larger, newer or more luxurious home.

Payment frequency

Contrary to popular belief, making mortgage payments every two weeks will only save you a few dollars a year. This type of payment is often confused with accelerated payments.

Time required to repay a $200,000 mortgage at an annual interest rate of 4%
You make a payment... Periodic payment Annual payment Time required to repay mortgage
monthly $1,048 $12,574 25 years
bi-weekly $484 $12,574 24.96 years
weekly $242 $12,574 24.95 years
accelerated bi-weekly $524 $13,621 21.90 years
accelerated weekly $262 $13,621 21.88 years

If you borrow $200,000 at an annual interest rate of 4%, your monthly payment will be $1,048, for an annual repayment amount of $12,574.

  • If you make bi-weekly payments, you will pay $484 every two weeks, for an annual repayment amount (26 two-week periods) of $12,574.
  • If you make bi-weekly accelerated payments, you will pay $524 every two weeks, representing the monthly instalment divided by 2. You would therefore pay $13,621 per year instead of $12,574. In this example, bi-weekly accelerated payments cut the repayment period down by 3 years, saving you about $16,000 in interest.

When you make accelerated payments, you save on interest because you pay more every year, which means you repay the principal more quickly. You don’t save on interest by making bi-weekly, instead of monthly, payments.

Insight

How to choose the frequency of your mortgage payments

An easy way is to synchronize them with your pay day. Do you get paid every two weeks? Then making bi-weekly mortgage payments will make it easier to manage your budget.

End of the insight

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Download the PDF (pdf - 6 MB)This link will open in a new windowUpdated on June 17, 2022

Documentation and tools

How changes in interest rates can impact your mortgage