Mortgage Overview: What It Is and How It Works

As a first-time home buyer, you’ll want to learn as much as you can about mortgages—what they are, how they work and how they can benefit you. While you may be consulting a mortgage specialist during the home-buying process, the more knowledgeable you can become about mortgages, the more likely you’ll be able to articulate what you need—and want—in a mortgage.

Here’s a short primer on mortgages and key mortgage terms to help get you started.

What is a mortgage?

A mortgage is a loan given by a bank or mortgage lender to help you buy a home.

It can allow you to get into a home sooner than if you had to save up for the whole purchase price. The house acts as collateral for the money you borrow under the mortgage loan. This means if you fail to make payments, the lender has the legal right to repossess the property through foreclosure.

Regular payments, typically made monthly, consist of both principal and interest, with the borrower obligated to service the debt over a predetermined period.

It is important for you as potential homebuyers to thoroughly understand the terms and conditions of a mortgage before entering into such an agreement, and consulting with a mortgage advisor is highly recommended to ensure an informed decision.

How a mortgage works when buying a home

• The buyer uses funds from a mortgage loan to pay the seller for the property and the buyer repays any money borrowed, plus applicable interest and fees, over a set period of time (e.g., typically, 5, 10, 15, 20, 25 or 30 years).
• The buyer repays the lender at set intervals (typically, every month or biweekly). A portion of the payment is used to pay down the amount borrowed (i.e., the principal) and a portion of the payment is applied to interest.
• The mortgage is registered on the property with the applicable provincial or territorial land registry office.
• In many cases, the buyer can move into the new home as soon as the closing is complete (although the terms of the sale/purchase agreement can sometimes specify a later move-in date).

Choosing the right mortgage

Choosing a mortgage is one of the biggest decisions you’ll make. Consult with an RBC Mortgage Specialist for overall guidance and support.

Some things you’ll want to consider:

• Type of mortgage: Fixed-rate or variable-rate; open or closed.
• Mortgage term: The length of time a mortgage rate and other conditions set out by the lender are in effect. Typically, mortgage terms lengths range from six month term up to 10 years.
• Amortization period: The total length of time it will take you to pay off your mortgage; typically people choose 25 or 30 years amortization periods.

A longer amortization period usually means lower monthly mortgage payments. However, it can also mean you’ll pay more interest overall because you’re taking longer to pay back the mortgage principal to the lender.

Consider the following when selecting your mortgage payment options:

Home ownership and building equity in your first home

Building equity is an important part of owning a home and having a mortgage. Equity is the difference between your property’s value and the amount you owe on your mortgage. There are extra things you can do to build equity:

• Make extra payments whenever possible to help reduce your mortgage principal (but be aware of prepayment penalties or fees).
• Make home/property improvements to increase the value.

Frequency of mortgage payments

You will also have the flexibility to choose the frequency of your mortgage payments. While monthly payments remain the typical choice of many home buyers, there are a number of other options available, including: semi-monthly, bi-weekly, accelerated bi-weekly, weekly and accelerated weekly. Keep in mind that the more often you make payments toward your principal, the more you will save on interest over the life of the mortgage.

When you select an accelerated weekly or bi-weekly payment option, you are essentially making the equivalent of one additional monthly payment each year which will help pay down your mortgage faster.

Tip to make paying your mortgage a bit easier: Schedule your mortgage payments to coincide with when you get paid.

Frequently Asked Questions

What is the difference between a loan and a mortgage?

A mortgage is a type of loan used specifically to buy real estate, such as a house or condominium. With a mortgage, the property itself serves as the collateral for the loan.

A loan is a more general term for borrowed money that must be repaid. Loans can be used for a wide range of purposes, such as financing a car, covering expenses, or paying for education. They can either be secured by collateral or unsecured, depending on the lender and the borrower's credit history.

In short, while all mortgages are loans, not all loans are mortgages.

How many mortgages can I have on my home?

There is no legal limit to how many mortgages you can have on your home. However, the number you qualify for depends on your lender's policies.

It’s possible to have more than one mortgage – for example, a primary mortgage plus a second mortgage or home equity loan. Approval will depend on factors such as your income, debt levels, and the amount of equity you have in your home.

What are the main features to compare across different mortgage types?

When evaluating different types of mortgages, you’ll want to look at several key features. These include:

• Interest rate type (fixed or variable)
• Mortgage term
• Amortization period
• Payment structure and flexibility
• Potential fees and pre-payment penalties
• Options to move (or port) the mortgage to another property

Comparing these features across your mortgage options can help you assess the cost, predictability, and terms of each one, ultimately helping you decide which mortgage best fits your financial situation and goals.

What is the difference between a mortgage interest rate and an APR?

A mortgage interest rate is the cost of borrowing the principal amount from a lender. The Annual Percentage Rate (APR), on the other hand, provides a more complete picture of the loan's total cost. It includes not only the interest rate but also upfront costs such as origination fees and discount points. Because it factors in these additional costs, the APR is typically higher than the interest rate, reflecting a more accurate overall cost of borrowing.

Connect with an RBC Mortgage Specialist to discuss all the mortgage options available to you.

 

This article offers general information and should not be regarded as a complete analysis of the subject matter discussed. It is not intended as legal, financial or other professional advice. Consult appropriate professional advisors regarding your specific situation.

Personal lending products and residential mortgages are offered by Royal Bank of Canada and are subject to its standard lending criteria. Conditions apply.