Financial Literacy Month: 5 concepts to finally understand your mortgage

People often mix them up, yet they don’t measure the same thing.

• Amortization is the total length of time planned to repay your loan completely, often 25 or 30 years.
• The term is the length of your current contract with the lender, usually 1 to 10 years, with the 5-year term being the most common. At the end of the term, you renew, with the same lender or another, on the terms of the day.

Amortization has a direct effect on your payment and on the total cost of the loan. In our example:

• over 25 years, the monthly payment is about $1,660, for about $198,100 in total interest;
• over 30 years, it drops to about $1,513, but total interest rises to about $244,600.

A longer amortization eases the monthly budget, but it costs more in the end. It’s a choice to make with your eyes open, especially when refinancing.

• With a fixed rate, the rate and the payment stay the same for the whole term. It’s predictable.
• With a variable rate, the rate follows your lender’s prime rate (its reference rate), which itself goes up or down with the Bank of Canada’s decisions. Depending on the contract, it’s your payment that changes, or the share of that payment that repays the principal, meaning the amount you borrowed.

There is no universally right choice: it all depends on your budget, your ability to handle a payment increase and your plans. Above all, remember that the type of rate also affects the penalty if you have to end your contract before the planned date (concept 5).

Equity is the share of your home that truly belongs to you: its value, minus what is left to repay on the mortgage.

It’s a key concept when you’re considering a refinance because, according to the Financial Consumer Agency of Canada (FCAC)², financial institutions usually let you borrow up to 80% of the property’s value.

Example: your home is appraised at $450,000 and you have $280,000 left to repay.

• 80% of $450,000 = $360,000
• $360,000 − $280,000 = $80,000 at most, before fees and subject to the lender’s approval.

It’s this equity that makes it possible, for example, to bring high-rate debts into the mortgage, that is, to increase the mortgage loan to repay your other debts and have just one payment, at a lower rate. To learn more, see our page on debt consolidation.

To approve a loan or a refinance, the lender checks that your payments stay reasonable compared with your income. It uses two ratios:

• GDS (gross debt service): the share of your gross income (before tax) that goes to housing, meaning the mortgage payment, property taxes, heating and, where applicable, part of the condo fees.
• TDS (total debt service): the same thing, plus all your other debts (car loan, credit cards, lines of credit, etc.).

What are the thresholds? In general, lenders accept a GDS of at most 39% and a TDS of at most 44%. These are the benchmark thresholds of the Canada Mortgage and Housing Corporation (CMHC)³. But each lender then applies its own policy: some are stricter, others more flexible depending on the borrower’s profile. That is one of the reasons it’s better to be guided by a professional, who knows each lender’s requirements.

The stress test. To calculate these ratios, the lender doesn’t use your real rate but a higher rate, called the qualifying rate. This is the “stress test,” which also applies to a refinance⁴. The rule, set by the Office of the Superintendent of Financial Institutions (OSFI)⁵, the federal body that oversees banks, is simple: take your rate + 2%, with a minimum of 5.25%. Note that this 5.25% minimum is the one in force in the fall of 2026. OSFI can change it in the future, so always check the current rule, or ask your broker.

• Your rate is 4%: you have to qualify at 4% + 2% = 6%.
• Your rate is 3%: 3% + 2% would give 5%, but the current minimum of 5.25% applies.

In other words, the lender checks that you could still make your payments if your rate went up by 2%.

Back to our example. With a rate of 4.5%, the test is done at 4.5% + 2% = 6.5%. At that rate, the payment used for the calculation is about $2,009 a month, instead of $1,660. For a household that earns $8,000 gross a month and pays $350 in property taxes and $100 in heating:

• GDS = ($2,009 + $350 + $100) ÷ $8,000 = $2,459 ÷ $8,000 = about 31%, under the 39% threshold.
• TDS = ($2,459 + $920 in other debts) ÷ $8,000 = $3,379 ÷ $8,000 = about 42%, close to the 44% threshold.

It is often consumer debts that make the difference. To run your own numbers, see our article on how to determine your borrowing capacity, or talk to a professional.

If you repay your mortgage or end it before the end of the term, for example to refinance, the lender can charge a penalty⁶.

• Variable rate: it usually equals 3 months’ interest. On a balance of $250,000 at 4.5%, that’s about $2,800.
• Fixed rate: it’s generally the higher of 3 months’ interest and the interest rate differential, a calculation that compares your rate with the one the lender offers today for the remaining term. Put simply: if rates have dropped since you signed, the lender loses money by letting you go, and asks you to make up for that loss. This amount can be much higher than 3 months’ interest.

The calculation method varies from lender to lender and is in your contract.