Canadian Mortgages: Terms, CMHC, and Renewal

In Canada, mortgage interest is calculated differently than in the US. By law, Canadian mortgages are compounded semi-annually, not monthly. This slightly lowers your effective interest rate compared to monthly compounding.

Most Canadian mortgages have an "amortization period" (total life of the loan, e.g., 25 years) and a "term" (length of your current contract, e.g., 5 years). You renew your interest rate every term, meaning your rate isn't locked for the full 25 years.

This front-loaded interest structure still applies: your early payments are mostly interest. On a $500,000 mortgage at 5%, your first payment is largely interest. By year 20, it shifts to mostly principal.

Accelerated payment options (bi-weekly accelerated) are popular in Canada because they result in one extra monthly payment per year, shaving years off your amortization.

In Canada, you typically choose between a fixed-rate and a variable-rate mortgage for your term (e.g., 5 years).

A fixed-rate mortgage guarantees your interest rate and payment for the entire term. It offers stability and peace of mind, protecting you if the Bank of Canada raises rates. It's the most popular choice for first-time buyers.

A variable-rate mortgage floats with the "prime rate." If prime goes down, you pay less interest (and more principal). If prime goes up, you pay more interest. Some variable mortgages have fixed payments (where the interest portion fluctuates), while others have adjustable payments.

Historically, variable rates have often saved money, but they carry the risk of rising payments or "trigger rates" where your payment no longer covers the interest.

If you put less than 20% down on a home in Canada, you are required to purchase Mortgage Default Insurance (often called CMHC insurance). This protects the lender if you default.

The cost ranges from 2.8% to 4.0% of your mortgage amount, depending on your down payment. This amount is typically added to your mortgage balance and paid off over time.

While it adds cost, it allows you to buy a home with as little as 5% down. Homes over $1 million are not eligible for this insurance, meaning you must have 20% down for properties over that price point.

Unlike the US "PMI," you cannot cancel this insurance once you reach 20% equity. It's a one-time premium paid at the start (financed into the loan).

In Canada, your mortgage term (usually 5 years) expires long before your loan is paid off. At the end of the term, you "renew" your mortgage for another term at current market rates.

Renewing with your current lender is often easiest, but they may not offer the best rate. Shopping around at renewal time is crucial—you can switch lenders without penalty at renewal to get a better deal.

Refinancing is different—it involves breaking your current contract to change the loan amount (pull out equity) or amortization. This triggers a prepayment penalty.

For fixed-rate mortgages, the penalty is the greater of 3 months' interest or the Interest Rate Differential (IRD)—which can be huge. Always check your penalty before refinancing mid-term.