# How Mortgages Work in Canada: Terms, Rates, Stress Test > How a Canadian mortgage works: down payments, term vs amortization, fixed vs variable, the stress test, renewal and prepayment penalties, with examples. Source: https://trykosh.com/learn/how-mortgages-work-in-canada Guide - Homes and mortgages # How mortgages work in Canada, from down payment to renewal A Canadian mortgage has a few moving parts that confuse almost everyone the first time: the term isn't the amortization, the rate you qualify at isn't the rate you pay, and breaking a fixed mortgage early can cost thousands. Here's each piece in plain language, with numbers. Updated October 31, 20265 min readBy the Kosh team On this page[How much do I need for a down payment?](#down-payment)[Term vs amortization: what's the difference?](#term-vs-amortization)[Fixed vs variable: which is better?](#fixed-vs-variable)[What is the mortgage stress test?](#stress-test)[What happens at renewal?](#renewal)[Prepayments and penalties](#prepayment)[Other costs to budget for](#costs)[FAQs](#faq) ## How much do I need for a down payment? The legal minimum depends on the price. On a home under $500,000 it's 5%. From $500,000 up to $1.5 million it's 5% of the first $500,000 plus 10% of the rest. At $1.5 million or more it's 20%. Minimum down payment by purchase price Purchase price Minimum down payment As a share $400,000 $20,000 5% $600,000 $35,000 5.8% $900,000 $65,000 7.2% $1,200,000 $95,000 7.9% $1,600,000 $320,000 20% Put down less than 20% and your mortgage must be insured against default, which adds a premium to the loan. See [CMHC mortgage insurance](/learn/cmhc-mortgage-insurance). First-time buyers can build the down payment faster with an [FHSA](/learn/fhsa-explained) and the [Home Buyers' Plan](/learn/home-buyers-plan). ## Term vs amortization: what's the difference? - **Amortization** is how long it would take to pay the whole mortgage off at the current payment, commonly 25 years. Insured mortgages can be amortized over up to 30 years for first-time buyers and buyers of newly built homes (since December 15, 2024); otherwise insured mortgages are limited to 25. - **Term** is how long your current contract, rate and conditions last, usually somewhere between one and ten years, with five years the most common. When the term ends you renew, usually at a new rate, for the balance left. So a 25-year mortgage is typically five 5-year terms, each at whatever rate is on offer at the time. Longer amortization lowers the payment but raises total interest. Take a $600,000 home bought with the minimum down payment: with the insurance premium added, the mortgage is $587,600. That mortgage at an assumed 4.5% costs $3,252 a month over 25 years and $2,963 over 30 years. Over the full life, if the rate never changed, that's $975,662 against $1,066,597 in payments. ## Fixed vs variable: which is better? Fixed rate Variable rate Rate during the term Locked in Moves with the lender's prime rate Payment Same every month Either changes with prime, or stays fixed while the share going to interest changes Breaking early Penalty is usually the higher of three months' interest or the interest rate differential (IRD), which can be large Penalty is usually three months' interest Suits People who want certainty and a stable budget People with room in the budget to absorb rate rises Neither is better in general: it depends on where rates go during your term, which nobody knows. Choose by what you can live with. If a rise in rates would break your budget, the certainty of a fixed rate is worth paying for. ## What is the mortgage stress test? To get an uninsured mortgage from a federally regulated lender (a bank), you have to qualify at the greater of your contract rate plus 2 percentage points or 5.25%. That's OSFI's minimum qualifying rate. Insured mortgages have their own federal qualifying rules, which your lender applies. Using the same loan as an illustration, at an assumed contract rate of 4.5% you'd be tested at 6.5%: a payment of $3,936 a month instead of $3,252. The lender checks that your housing costs and total debts still fit your income at that higher payment. You don't pay the higher rate; it's only a test. At renewal, OSFI doesn't expect lenders to apply the qualifying rate when you switch an uninsured mortgage to another federally regulated lender without borrowing more (a straight switch), so shopping around at renewal is easier than it used to be. ## What happens at renewal? A federally regulated lender must send you a renewal statement at least 21 days before your term ends, showing the balance, rate, term and fees. You don't have to accept it. Compare offers from other lenders a few months before the end of the term; many will hold a rate for a period. If you do nothing, check what happens under your contract: some mortgages renew automatically into a short term. ## Prepayments and penalties Most mortgages are **closed**: you can only prepay up to the limits in your contract (for example, a lump sum once a year or a higher regular payment) without a penalty. **Open** mortgages let you repay any amount at any time, at a higher rate. Break a closed mortgage early, by selling, refinancing or switching before the term ends, and you pay a prepayment penalty: usually the higher of three months' interest or the interest rate differential. Lenders calculate the IRD differently, so ask for the actual figure in writing before you decide. Using your annual prepayment privilege is one of the simplest ways to cut total interest. ## Other costs to budget for - **Mortgage insurance premium** if you put down less than 20% (added to the loan; provincial sales tax on it in Quebec, Ontario and Saskatchewan has to be paid up front). - **Land transfer tax** in most provinces, and in some cities a municipal one on top; first-time buyers may get a rebate. - **Legal fees, home inspection, appraisal, title insurance and moving.** - **Property tax, home insurance, utilities and maintenance** every year, plus condo fees if applicable. [Free tool**Mortgage payment calculator**Work out your mortgage payment the way Canadian lenders do, with semi-annual compounding, any payment frequency and CMHC insurance added when you put down less than 20%.](/tools/mortgage-payment-calculator) **Where Kosh fits** Kosh reads your bank and card statements to show what you really spend each month, so the mortgage payment you plan for is one your budget can carry. It tracks your renewal date and reminds you months ahead to compare offers. ## Frequently asked questions What is the minimum down payment in Canada? 5% on a home up to $500,000; 5% of the first $500,000 plus 10% of the rest up to $1.5 million; and 20% on homes of $1.5 million or more. What is the difference between mortgage term and amortization? Amortization is the total time to pay off the mortgage, often 25 years. The term is the length of your current contract and rate, often five years. You renew several times over one amortization. What is the mortgage stress test rate? For uninsured mortgages from federally regulated lenders, you must qualify at the greater of your contract rate plus 2 percentage points or 5.25%. It's a qualification test only; you pay your actual contract rate. How much is the penalty for breaking a mortgage? Usually the higher of three months' interest or the interest rate differential for fixed-rate mortgages, and three months' interest for variable. Lenders calculate the IRD differently, so ask yours for the exact amount. Can I get a 30-year mortgage in Canada? Yes. Uninsured mortgages (20% or more down) can be amortized over 30 years or more at many lenders. Insured mortgages allow 30 years for first-time buyers and buyers of new builds since December 15, 2024. ## Sources - [FCAC: Down payment](https://www.canada.ca/en/financial-consumer-agency/services/mortgages/down-payment.html) - [OSFI: Minimum qualifying rate for uninsured mortgages](https://www.osfi-bsif.gc.ca/en/supervision/financial-institutions/banks/minimum-qualifying-rate-uninsured-mortgages) - [FCAC: Renewing your mortgage](https://www.canada.ca/en/financial-consumer-agency/services/mortgages/renew-mortgage.html) - [FCAC: Mortgage prepayment penalties](https://www.canada.ca/en/financial-consumer-agency/services/mortgages/reduce-prepayment-penalties.html) - [Department of Finance: Mortgage reforms (September 2024)](https://www.canada.ca/en/department-finance/news/2024/09/government-announces-boldest-mortgage-reforms-in-decades-to-unlock-homeownership-for-more-canadians.html) Written by the Kosh team and checked against the rules in force on October 31, 2026. This guide is general information, not tax, legal or investment advice. Kosh is an educational financial planning tool by Primedepth Labs. It is not registered with any Canadian securities regulator as an adviser or dealer, does not recommend specific securities, and does not hold your money or execute trades. Tax figures are estimates; confirm with the CRA or a qualified professional before acting. Investing carries risk. ## Upload your statement and Kosh does this for you. Kosh reads your bank, card and investment statements, estimates your federal and provincial tax and turns guides like this one into your own numbers and next steps. [Start free](/signup?via=learn-how-mortgages-work-in-canada)