How Does a Mortgage Work in Canada? (2026 Beginner's Guide)
A plain-English explanation of how mortgages work in Canada — principal and interest, term vs. amortization, fixed vs. variable, and the full path from application to payoff.
A plain-English explanation of how mortgages work in Canada — principal and interest, term vs. amortization, fixed vs. variable, and the full path from application to payoff.
A mortgage is the largest loan most people will ever take on, yet the basics are rarely explained clearly. If you understand a handful of concepts — principal and interest, term versus amortization, and how payments work — the rest falls into place. Here's how mortgages actually work in Canada.
The short answer
A mortgage is a loan to buy property, secured by the property itself. You repay it in regular payments split between principal (the amount borrowed) and interest (the lender's charge). In Canada, your amortization is the total payoff period (often 25–30 years), while your term is the shorter contract you renew along the way (often 1–5 years). At the end of each term you renew until the mortgage is paid off. See mortgage options.
Principal and interest
Each payment does two things: reduces your principal (the balance you owe) and pays interest (the cost of borrowing). Early on, more of each payment goes to interest; over time the balance shifts toward principal. This is why extra payments early — when allowed by your prepayment privileges — save the most interest. Model it with the payment calculator.
Term vs. amortization — the concept that confuses everyone
These are different time spans:
- Amortization: the total time to fully repay the mortgage — commonly 25 years (up to 30 for some buyers).
- Term: the length of your current contract and rate — commonly 1 to 5 years.
You don't pay the whole mortgage off in one term. At the end of each term you renew the remaining balance at a new rate, repeating until the amortization ends and the mortgage is gone. Amortization is explored further in mortgage amortization explained.
Fixed vs. variable rate
Your interest rate is either fixed (locked for the term) or variable (moves with the lender's prime rate). Each has trade-offs around certainty, cost, and break penalties — see fixed vs. variable. In 2026, prime is 4.45% with the Bank of Canada holding at 2.25%.
Down payment and mortgage insurance
You pay part of the price upfront (the down payment) and borrow the rest. Put down less than 20% and you'll need mortgage default insurance — see what CMHC insurance is and how much you need in how much down payment you need.
The path from application to payoff
- Pre-approval — confirm your budget and lock a rate (how pre-approval works).
- Qualify — the lender checks income, credit, down payment, and the stress test.
- Approval and closing — appraisal, lawyer, and funds advance.
- Make payments — principal and interest each period.
- Renew — at each term-end until paid off.
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 (often 1–5 years) you renew along the way until the mortgage is fully paid.
How is a mortgage payment split?
Each payment covers interest plus a portion of principal. Early payments are interest-heavy; over time more goes to principal as the balance falls.
Do I pay off my mortgage in one term?
No. You renew the remaining balance at the end of each term, repeating until the amortization period ends and the mortgage is paid off.
How much down payment do I need?
From 5% on the first $500,000 of the price; under 20% requires mortgage default insurance. See our down payment guide for the full tiers.
New to mortgages? Talk to us — we'll walk you through every step in plain language and get you pre-approved with confidence.
Mortgage content produced by Mortgage Squad Advisors' team of FSRA-licensed mortgage advisors and reviewed under the supervision of the brokerage's Principal Broker (FSRA Brokerage #13737) before publication.