What is a Mortgage and How Does it Work?

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 are usually made monthly, bi-weekly or weekly and consist of both principal and interest. The borrower is obligated to re-pay the loan over a predetermined period.

It is important for you as a potential home buyer 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 mortgages work

When you get approved for a mortgage, the lender provides you with the funds to pay the seller for the home. You then repay what you borrowed, plus interest and fees over a set period.

Your payments are made regularly (every month, week, biweekly or accelerated). Each payment is split into two parts: one portion goes toward the principal (the original amount you borrowed), and the other covers interest (the cost of borrowing that money).

The mortgage gets officially registered against the property at your provincial or territorial land registry office. Once the sale closes, you can move into your new home right away.

Pre-approval and approval

Here are the essential steps of a mortgage approval process:

Pre-approval

Pre-approval is the first step in getting a mortgage. Your lender reviews your financial situation including your income, debts, and assets to determine how much you can borrow and the interest rate you'll likely be charged. Think of it as a conditional estimate rather than a final guarantee.

On average, the pre-approval process takes anywhere from a few hours to a few business days and remains valid up to 120 days.

Getting pre-approved is free and gives you a clear budget when house hunting. You can book an appointment with an RBC mortgage specialist or complete a digital mortgage pre-approval online (open in a new window). With a pre-approval in hand, you can be ready to make a strong offer when you find the right home.

Mortgage approval
Once your purchase offer is accepted, it's time to submit your full mortgage application. This includes your signed purchase agreement, property details, and updated financial documents. Your lender will verify your income, credit, and debt levels again to ensure nothing has changed since pre-approval.

The final mortgage approval process usually takes one to three weeks, but the entire process could last 30 to 60 days. Key steps and timelines are as follows:

• Full application review (1-2 business days): Submit your purchase agreement and property details. Your lender reviews updated financials and runs an updated credit check.

• Underwriting (2-3 business days): The lender confirms your income, credit, and debts haven't changed since pre-approval.

• Property appraisal (3-10 business days): An appraiser evaluates the home to confirm its value matches the loan amount.

• Conditional approval (3-10 business days): Your lender will issue a commitment letter with conditions like employment verification and proof of home insurance.

• Final unconditional approval (1-3 business days): Once all conditions are met and the appraisal is complete, you're cleared to close on your new home.

Mortgage contract

A mortgage contract is a legal agreement between you and your lender that outlines the terms of your home loan. It specifies the loan amount, interest rate, repayment schedule, and other important conditions. The contract also gives the lender the right to foreclose the property if you fail to make your payments as agreed.

Mortgage payment

A mortgage payment is the amount of money you pay your lender regularly (e.g. monthly, biweekly, weekly) when you buy your home with a mortgage loan. Understanding what's included in each payment helps you see exactly where your money goes:

Key considerations when getting a mortgage

There are several key factors to consider when choosing a mortgage.

Affordability

The recent RBC Spring Home Ownership Poll results show 65% of first-time home buyers (open in a new window) are ready to buy, but say their finances aren't, with almost two-thirds saying they don't know how much they can afford (64%). Therefore, figuring out what you can afford is the key to start. Look beyond just mortgage payments, factor in property taxes, home insurance, utilities, and maintenance costs. Consider your current income, existing debts, and any future financial changes.

For a quick estimate of how much you can afford to borrow, try the RBC Mortgage Affordability Calculator.

Down payment

A down payment is a big consideration to think through when purchasing a home.

What is a down payment?

Your down payment is the upfront cash you put toward buying your home. The lender then covers the difference between your down payment and the purchase price with a mortgage loan.

The larger your down payment, the smaller your mortgage and the lower your monthly payments.

What is the minimum down payment required in Canada?

Canadian lenders require a minimum down payment of 5% to 20%, depending on the home price. Mortgages with less than 20% down must be insured with Mortgage Default Insurance to protect the lender against a default by the borrower. You can pay it upfront or add it to your mortgage balance. This may increase your overall costs due to the added insurance premium.

Conventional mortgages require a down payment of at least 20% of the purchase price of the home. Because they don’t require default mortgage insurance, the total cost over the duration of the mortgage loan may be lower.

Here are the typical minimum down payment amounts based on your home’s purchase price:

What can be used as a down payment?

Personal savings, registered savings accounts (such as a TFSA, FHSA or RRSP) and gifted funds are great sources to help you cover your down payment.

• Money from your own personal savings are the ideal funds to use for your down payment.

• Tax-Free Savings Accounts (TFSAs) enable you to earn money tax-free, contribute even if you’re retired or not employed and withdraw your money at anytime for any reason.

• First Home Savings Accounts (FHSAs) can be used to contribute up to $40,000 for your first home. Your contributions are tax-deductible for up to 15 years, and you pay no taxes on investment earnings.

• Registered Retirement Savings Programs (RRSPs) let you withdraw up to $60,000 per person ($120,000 for couples) for your first home purchase through the Home Buyers' Plan. The funds must have been in your RRSP for at least 90 days. The withdrawal is tax-free if you repay it within 15 years.

• Gifted funds are financial contributions typically from your family that can cover all or part of your down payment, closing costs, or financial reserves.

Mortgage rates

Your mortgage rate is the interest your lender charges to loan you money. Think of it as the cost of borrowing.

On top of overall market updates, such as the Bank of Canada’s policy rate and Government of Canada bond yields (open in a new window), your specific rate depends on factors like:

• Your credit score

• The amount of your down payment

• Whether your mortgage is insured or not

• Your term and amortization period

Mortgage types

Different mortgage types are designed to suit various borrowing needs and financial situations.

By interest rate:

• Fixed-rate mortgage: Your interest rate stays the same for the entire term, ensuring predictable and consistent payments throughout.

• Variable-rate mortgage: Your rate fluctuates with the lender's prime rate, which means it can go up or down, potentially saving you money or costing you more over your term.

By flexibility:

• Open mortgage: Repay any amount at any time without penalties and convert to another term whenever you want. Best for paying off your mortgage quickly. Interest rates are typically higher than closed mortgages.

• Closed mortgage: Interest rates for closed mortgages are generally lower than for open mortgages. However, the amount and frequency with which you can make extra payments or prepayments is less flexible than with open mortgages. With a closed mortgage at RBC you can prepay up to 10% of the original principal amount of your mortgage once in every 12-month period. 
  

By down payment:

• Conventional mortgage: Requires a down payment of at least 20%. No mortgage default insurance is required.

• High-ratio mortgage: Requires less than 20% down, meaning you'll need mortgage default insurance to protect the lender. Often can have lower interest rates because it's insured.

Mortgage amortization

Your amortization period is the number of years you will need to pay off your mortgage. The length of your amortization can affect how much interest you pay over the life of your mortgage.

Standard amortization periods are 25 years, but shorter and longer periods may be available depending on several factors, such as the amount of your down payment.

A shorter amortization can save you money as you pay less interest over the life of your mortgage. Your regular mortgage payment amount would be higher as you are paying off your balance in less time. However, you may build the equity in your home faster and be mortgage-free sooner.

A longer amortization generally lowers your monthly payments but will require you to pay more in interest over the length of your term and may take longer to build equity in your home.

Mortgage term

Your mortgage term is the length of your contract with your lender, essentially your commitment period. The most common options are 3-year and 5-year terms.

For example, with a fixed rate mortgage, a 3-year fixed term lets you renew sooner and potentially adjust your rate in a shorter timeframe, while a 5-year fixed term provides stability by locking in your rate and payments for longer. The key is choosing what you can comfortably afford over the full term. Breaking a mortgage early can get expensive, so think realistically about your budget for the next 3 to 5 years.

While 3 and 5-year terms are the most common, mortgage terms can last anywhere from 6 months to 25 years. Speak with a mortgage advisor for help choosing the term length that’s right for you.

Need help deciding? Use our mortgage payment calculator or connect with an RBC Mortgage Advisor who can walk you through your options. We're here to help.

Mortgage payment frequency

How often you make mortgage payments affects how quickly you pay off your loan and how much interest you pay over time. Common payment frequencies include: Monthly, semi-monthly, biweekly, weekly, accelerated biweekly, and accelerated weekly.

Example: $350,000 Fixed-Rate Mortgage at 5.00% 

This chart illustrates how you can reduce your amortization period and save interest costs by choosing a more frequent payment schedule. 

Renewal or pay off

At the end of your mortgage term you have two main options: renew your mortgage for another term or pay it off completely. Your lender may reach out around 120 days before your renewal date to discuss your options.

Want to pay off your mortgage faster? You can:

• Accelerate your payments: Switch to more frequent payments (e.g., weekly or biweekly instead of monthly).

• Make lump-sum prepayments: Pay extra toward your principal when you have extra funds.

• Double-up payments: Make additional payments on top of your regular schedule. RBC gives you the flexibility to pay extra on any or every payment date, from $100 up to the principal and interest portion of your regular payment.

Prepayment charge

A mortgage prepayment charge is a fee paid when you break your mortgage early, whether you're refinancing, paying it off, or switching lenders. This compensates the lender for the interest they'll lose when the loan ends before its scheduled term.

With an RBC closed mortgage, you can prepay up to 10% of your original principal once per year without charge, applied directly to reduce your mortgage balance.

How to apply for a mortgage

When should you apply for a mortgage?

Timing your mortgage application right can streamline the home buying process and help you secure the best terms. Here's when to apply:

• Get pre-approved first: Before seriously searching for a home, get pre-approved to understand your budget. RBC mortgage pre-approvals typically last 120 days, locking in your rate while you search.

• Ensure stable finances: Lenders prefer consistent income, strong credit scores, and manageable debt levels.

• After major purchases: Hold off on big expenses like buying a car before applying, as they can affect your borrowing capacity.

Plan to apply 3–6 months before you intend to buy. This gives you time to gather documents and make any necessary financial adjustments. Consulting with a mortgage specialist can help align your application with your goals.

What are the requirements?

Whether you qualify for a mortgage depends on your income, employment history, debt-to-income ratio, and credit score.

Debt-to-income ratio
This compares your monthly debt payments (e.g., credit cards, car loans, etc.) to your monthly income. A lower ratio is better because it shows you have more income available for mortgage payments. A high ratio may limit your borrowing amount.

Credit score
Your credit score reflects how well you've managed credit. It's based on payment history, debt levels, and credit usage. A score below 600 can make it difficult to qualify for a mortgage.

Mortgage stress test
The mortgage stress test is a federal requirement designed to ensure you can still afford your mortgage payments if interest rates rise or your financial situation changes. Lenders use it to confirm you're not taking on more debt than you can handle, even in less favourable conditions.

To increase your chances of approval, ensure you have the following essential documents ready:

• Official government-issued identification

• Proof of income (i.e. income statements or invoices)

• Proof of down payment

• Debt details

• Property details

Connect with an RBC Mortgage Specialist for a complete list of requirements and help with your pre-approval application.

Why get a mortgage with RBC?

More ways to get value

Your mortgage is just the beginning. Our current mortgage offer includes cash plus Avion points, so right off the bat you should see extra value when you choose RBC. Through our Avion Rewards program, you can shop, earn, save and redeem at over 2,000 partner brands, think Canadian Tire, Petro-Canada, Rexall, and DoorDash, for your everyday needs.

And if you have an RBC chequing or savings account enrolled in the Vantage program, you'll save on monthly fees and earn Avion points on debit purchases. It all adds up to more flexibility and more value, right where you need it.

Expert support, wherever you are

Our dedicated mortgage experts are ready to walk you through everything you can expect as a first-time home buyer. With the largest mortgage sales team in Canada and competitive rates, we're here to serve you wherever you are, in branch, online, or over the phone.