How a mortgage works

A mortgage is a loan used to buy a property. How much interest you pay depends on 3 factors:

  1. How much you borrow (the principal)
  2. The interest rate on the loan
  3. How long you take to pay it back (the amortization period)

Shop around and compare interest rates. You also may end up with a better rate if you negotiate with your lender.

Your down payment

The bigger your down payment, the smaller your mortgage and the less interest you’ll pay. Aim for a down paymentDown payment The money you put into buying a large item like a car or home.+ read full definition of at least 20% of the purchase price.

If you can’t afford to put down 20% of the purchase price, you’ll need to apply for a high-ratio mortgageMortgage A loan that you get to pay for a home or other property. Often the loan is for 20 years or more. You make a set number of payments for a set amount each year.+ read full definition. You will have to buy mortgage default insurance with this type of mortgage because there is a greater chance you may default on your mortgage payments.

Where to get a mortgage

  • Banks
  • Mortgage companies
  • Insurance companies
  • TrustTrust An account set up to hold assets for a beneficiary. A trustee manages the assets until the beneficiary reaches legal age.+ read full definition and loanLoan An agreement to borrow money for a set period of time. You agree to pay back the full amount, plus interest, by a set date.+ read full definition companies
  • Credit unions.

Consider a mortgage brokerBroker A registered person who brings together someone who wants to buy investments with someone who wants to sell. Brokers often charge a fee or commission for buying and selling investments for you.+ read full definition

A mortgage broker has access to a number of lenders and may be able to get you a better deal. And it costs you nothing – most lending institutions will pay the broker’s fee.

Key point

How much interest you pay depends on:

  1. How much you borrow
  2. The interest rateInterest rate A fee you pay to borrow money. Or, a fee you get to lend it. Often shown as an annual percentage rate, like 5%. Examples: If you get a loan, you pay interest. If you buy a GIC, the bank pays you interest. It uses your money until you need it back.+ read full definition on the loan
  3. How long you take to pay it back

 Fast facts

In 2011, about 40% of all recent buyers  in Canada got their mortgages through mortgage brokers. This number does not include mortgages that were refinanced or renewed.

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