How Does a Mortgage Work in Canada? (2026)

A mortgage is the largest loan most Canadians will ever take on, yet the mechanics are rarely explained in plain language. Once you understand a handful of ideas — how principal and interest work, the difference between your amortization and your term, and what happens at renewal — the rest of the 2026 mortgage landscape falls into place. Here's how a mortgage actually works in Canada.

The short answer

A mortgage is a loan to buy property that is secured by the property itself, meaning the lender can take the home if you stop paying. You repay it through regular payments split between principal (the amount borrowed) and interest (the lender's charge). In Canada, your amortization is the total payoff period — often 25 or 30 years — while your term is the shorter contract you renew along the way, often 1 to 5 years. You renew at the end of each term, at the rate available then, until the mortgage is fully paid off.

Principal vs. interest, and how payments are applied

Every regular payment does two jobs: it reduces your principal (the balance you still owe) and pays the interest the lender charges for the period. Early in the mortgage, most of each payment goes to interest because the balance is large. As the balance falls, more of each payment chips away at principal — this is called amortization. That's also why prepayments made early, within your lender's prepayment privileges, save the most interest over the life of the loan. Model different payment scenarios with the mortgage payment calculator.

Amortization vs. term — the distinction that confuses everyone

This is the single most important concept unique to how Canadian mortgages work. They are two different time spans:

Unlike a 30-year fixed mortgage in the United States, you do not lock your rate for the whole amortization. A 25-year amortization might be made up of five separate 5-year terms. At each term-end you renew the remaining balance at whatever rate is available then — see mortgage renewal for how that works.

Fixed vs. variable rate

Your interest rate is either fixed or variable for the term:

• Fixed rate — locked for the entire term, so your rate and payment don't change. Predictable, but breaking the contract early can carry a larger penalty (an interest rate differential).
• Variable rate — moves with the lender's prime rate, which follows the Bank of Canada's policy rate. Your payment or the portion going to interest can change as rates move. Penalties to break are usually smaller (often three months' interest).

Neither is automatically "better" — it depends on your risk tolerance and where rates are headed. Compare current options on the rates page.

Down payment and CMHC mortgage insurance

You pay part of the purchase price upfront — the down payment — and borrow the rest. The minimum is 5% on the first $500,000 of the price and 10% on the portion above $500,000, up to $1.5 million; homes priced at $1.5M and over require 20% down. If your down payment is under 20%, you have a high-ratio mortgage and must carry mortgage default insurance (from CMHC, Sagen, or Canada Guaranty). This insurance protects the lender, not you, and the premium is added to your mortgage balance. The trade-off is that it lets you buy with as little as 5% down.

The stress test

Before approving you, federally regulated lenders must apply the mortgage stress test. You have to prove you could still afford payments at a qualifying rate — the higher of 5.25% or your contract rate plus 2%. So if you're offered 4.5%, you must qualify as though the rate were 6.5%. This is meant to ensure you can handle payments if rates rise by renewal. It directly affects how much you can borrow — see how the math plays out with the mortgage affordability calculator.

A worked payment example

Imagine a $500,000 mortgage at a 4.5% fixed rate amortized over 25 years, with monthly payments:

• Your monthly payment is roughly $2,770.
• In the first month, about $1,875 of that goes to interest and only about $895 to principal.
• Years later, after the balance has dropped, far more of each identical payment goes to principal instead of interest.

The payment amount stays the same on a fixed mortgage, but the split shifts steadily toward principal — that's amortization in action. Plug in your own numbers with the payment calculator.

What happens at renewal

When your term ends, the remaining balance doesn't disappear — you renew it. Your lender sends a renewal offer, but you are free to shop around and switch to another lender for a better rate, often without re-qualifying through the full stress test if you're simply switching the existing balance. Renewal is one of the best moments to save money, yet many borrowers just sign the first offer. Read more in our mortgage renewal guide.

What "secured by the home" means

A mortgage is a secured loan: the home is the collateral. This is why mortgage rates are lower than credit cards or unsecured loans — the lender's risk is backed by the property. The flip side is that if you default, the lender has the legal right to take possession and sell the home to recover what it's owed. Staying current on payments keeps that security working in your favour.

Frequently asked questions

What's the difference between term and amortization?

Amortization is the total time to repay the whole mortgage (often 25–30 years); the term is the shorter contract and rate period (often 1–5 years) you renew along the way until the mortgage is fully paid off.

How is a mortgage payment split between principal and interest?

Each payment covers the interest for the period plus a portion of principal. Early payments are interest-heavy; as the balance falls, more of each payment goes to principal.

Do I pay off my whole mortgage in one term?

No. At the end of each term you renew the remaining balance at the rate available then, repeating until the amortization period ends and the mortgage is gone.

How much down payment do I need?

From 5% on the first $500,000 of the price and 10% on the portion above, up to $1.5M; homes at $1.5M and over need 20%. Under 20% down requires mortgage default insurance.

What is the mortgage stress test?

It's a rule requiring you to qualify at the higher of 5.25% or your contract rate plus 2%, proving you could still afford payments if rates rose. It caps how much federally regulated lenders will lend you.

Can I switch lenders at renewal?

Yes. You don't have to accept your current lender's renewal offer — shopping around at renewal is one of the easiest ways to lower your rate and save on interest.

New to mortgages? Ask Maya for instant, plain-language answers any time, compare current options on the rates page, or contact our team to talk it through. Mortgage Squad Advisors (FSRA #13737) will walk you through every step.