Tuesday, December 15, 2009

Canadian Mortgage How To's

In response to a comment question, I decided to modify and re-post my long answer in case anyone else is interested in how mortgages work in Canada.

  1. When you get a mortgage here, you commit to an overall time frame ie. 15, 20, 25, 30, 35 yr amortization.
  2. Then you pick the type of mortgage, variable or fixed rate, open or closed.
  3. Finally you pick your term ie. 1-5yrs. That and your credit rating will determine your rate.
  4. You are committed for the duration of the term to whatever rules apply to your mortgage. Our banks don't like it when you pay too fast and too soon so they penalize. Open mortgages allows you to pay it off any time you want but the rate is quite high and the term short -- currently 6.55% for a max. 1 year term.
  5. When the term is up, then you renegotiate for the next block of time, choosing the type of mortgage product you wish and this continues until you reach the end of your amortization.

Thus, you are privy to whatever is happening to the world at the time of renewal. We are just "lucky" that the rates have dropped in our variable mortgage because the economy has tanked. This is the 4th and 5th house I've bought in my lifetime and the first time rates have fallen so dramatically.

Two years ago, we amortized for 12 years, taking a 5 year variable, closed mortgage. Eight months later, we did the same for the ski condo at a slightly higher rate. When both 5 year terms ends in 3 years or so, I don't want to renegotiate as I would likely have to at a much higher rate.

That's why we are doing what we are doing, within the confines of our mortgage rules. Luckily, we can get very close to our goal despite their rules. I have cash and a line of credit that charges prime + 1% I will use to pay out the rest of the mortgage if there is an amount left over in 3 years. I don't want an open mortgage unless my bank makes me offer that beats my line of credit.

Finally, in Canada we are not allowed to write off mortgage interest on our income tax so it is in our best interest to get rid of a mortgage ASAP.


  1. So by playing within their rules, you are still making additional principal payments, but the term won't be reduced? Or will it? I'm still a bit confused.

  2. Good Post! Unfortunately, I think a lot of Canadians don't really understand how our mortgages work.

    You could also add that in Canada all mortgage interest compounds semi-annually and not in advance (this is another difference from our neighbours to the south) and is to our advantage

    Mortgage interest in Canada can be tax deductible if the funds are borrowed for the purpose if investing a la the the "Smith Manoeuvre" but CRA requires a paper trail to prove your deduction.

    Although the mortgage interest isn't deductible, we don't pay taxes on capital gains (provided it is your principal residence).

  3. @ The Executioner

    No, the term does not get reduced, only my overall amortization will. I am trying to get my amortization to equal the remainder of my 5 year term. If I achieve that, then we will have paid off our mortgage in 5 years, like what you are working on.

    @ Anonymous

    Thanks so much for your post additions. I didn't know about the interest compounding semi-annually. I wouldn't be a great candidate for the Smith Manoeuver because because I would want to pay off the loan asap!