Mortgages and Financing Basics for Realtors

Realtors don't give mortgage advice, but understanding financing lets you set realistic budgets, structure sound conditions, and know when to route a client to a mortgage broker or lender.

Pre-qualification vs. Pre-approval vs. Final Approval

These three terms are often used loosely but mean different things:

• Pre-qualification — an informal, quick estimate of how much a buyer might borrow, based on self-reported income, debts, and down payment. No documents are verified and no credit check may be done. It is a rough ballpark, not a commitment.
• Pre-approval — a more formal step where a lender reviews documented income, credit, and down payment and indicates a maximum loan amount and an interest rate, often with a rate hold (commonly around 90–120 days — confirm with the lender). A pre-approval strengthens an offer but is still conditional and not a guarantee of final financing; it can change if the buyer's situation changes.
• Final approval (commitment) — full approval on a specific property once the buyer has an accepted offer. The lender verifies the property (often via appraisal), the purchase details, and updated borrower information, and issues a firm mortgage commitment. Only at this stage is financing effectively confirmed — which is why a financing condition in the offer matters (see below).

The Mortgage Stress Test (OSFI Guideline B-20)

Federally regulated lenders must qualify most residential mortgages using a minimum qualifying rate (MQR), commonly called the stress test. The borrower must show they can afford payments at the higher of:

• the mortgage contract rate + 2%, or
• the floor rate of 5.25%.

So even if the client is offered a lower contract rate, they must qualify at the greater of contract-rate-plus-2% or 5.25%. This applies to uninsured mortgages under OSFI Guideline B-20, and an equivalent qualifying standard applies to insured mortgages. The 2% buffer and the 5.25% floor are set by OSFI and can change — verify the current MQR at osfi-bsif.gc.ca.

There is a notable exemption: borrowers doing a straight switch at renewal (same amortization and loan amount) between federally regulated lenders may be exempt from re-passing the stress test — confirm current rules.

High-Ratio vs. Conventional, and Mortgage Default Insurance

The down payment determines whether default insurance is required:

• Conventional (low-ratio) mortgage — down payment of 20% or more (loan-to-value 80% or less). No default insurance required.
• High-ratio mortgage — down payment of less than 20% (LTV above 80%). Mortgage default insurance is mandatory.

Mortgage default insurance protects the lender if the borrower defaults; the borrower pays the premium. It is provided by three insurers using the same premium schedule:

• CMHC (the federal Crown corporation),
• Sagen (formerly Genworth Canada), and
• Canada Guaranty.

Minimum down payment (verify current at canada.ca/CMHC)

• 5% on the first $500,000 of purchase price, plus
• 10% on the portion above $500,000.
• Homes at or above the insurable price cap require 20% down (no insurance available).

Maximum insurable price and amortization (verify current)

• As of December 15, 2024, the maximum home price eligible for insured (high-ratio) financing was raised to $1.5 million (up from $1 million).
• Also effective December 15, 2024, 30-year amortizations on insured mortgages became available to first-time homebuyers (new or resale homes) and to all buyers of newly built homes; otherwise the standard insured maximum amortization has been 25 years. These caps and eligibility rules change — verify current at canada.ca/CMHC.

Insurance premium (illustrative; verify current CMHC schedule)

The premium is a percentage of the loan amount, rising as the down payment shrinks. Representative homeowner rates from the CMHC schedule:

The premium is usually added to the mortgage and amortized. Extended-amortization and certain other features can add a surcharge (e.g., a surcharge for amortizations beyond 25 years). In Ontario, PST (8%) applies to the premium and must be paid up front in cash (it cannot be added to the loan). Confirm the current rate table and surcharges at cmhc-schl.gc.ca.

Fixed vs. Variable Rate

• Fixed-rate — the interest rate is locked for the term; payments are predictable. Breaking a fixed mortgage early typically triggers a penalty of the greater of three months' interest or the Interest Rate Differential (IRD), which can be large.
• Variable-rate — the rate moves with the lender's prime rate. Payments (or the interest/principal split) can change as rates move. Prepayment penalties are usually smaller (often three months' interest). Variable can cost less or more than fixed depending on rate movements.

Term vs. Amortization

These are frequently confused:

• Term — the length of the current mortgage contract (commonly 1–5 years, sometimes longer). At the end of the term the borrower renews (renegotiates rate/lender) or pays off the balance.
• Amortization — the total time to pay the mortgage to zero (commonly 25 years; up to 30 years where permitted — see insured caps above). A borrower moves through several terms over one amortization period.

GDS and TDS Ratios

Lenders test affordability with two debt-service ratios, calculated using the stress-test qualifying rate:

• Gross Debt Service (GDS) — housing costs as a % of gross income: mortgage payment + property taxes + heating + 50% of condo fees (if applicable).
• Total Debt Service (TDS) — GDS plus all other debt payments (car loans, credit cards, lines of credit, student loans, support payments).

For insured mortgages, CMHC has generally applied maximums of about GDS 39% and TDS 44% for stronger borrower profiles (thresholds can vary by credit profile and program — verify current limits at cmhc-schl.gc.ca). Lower ratios mean more borrowing room.

The Financing Condition in the Agreement of Purchase and Sale

Because a pre-approval is not final approval, buyers who need a mortgage should generally include a financing condition in the offer. A typical condition makes the offer conditional on the buyer arranging satisfactory financing by a stated date (often a few business days after acceptance), and provides that the offer is void (deposit returned per the APS) if the buyer gives notice the condition isn't met. Key points for realtors:

• It gives the lender time to complete final approval on the specific property, including any appraisal.
• Waiving the financing condition (common in competitive markets) removes this protection and puts the deposit and the deal at risk if financing falls through — advise clients to speak with their lender and lawyer first.
• Exact clause wording should come from current OREA forms/clauses and the client's lawyer.

Realtor Quick Reference

• Under 20% down = high-ratio = default insurance required (CMHC/Sagen/Canada Guaranty), added to the loan; 20%+ = conventional, no insurance.
• Clients must qualify at the stress-test rate (greater of contract + 2% or 5.25% — verify current).
• Min down payment: 5% to $500k, 10% above; insured price cap $1.5M and select 30-year amortizations (as of Dec 15, 2024 — verify current).
• Term ≠ amortization; pre-approval ≠ final approval.
• Use a financing condition unless the client has confirmed financing and understands the risk of waiving it.

Reference text, not financial or mortgage advice. Qualifying rates, insurance premiums, price caps, amortization limits, and debt-ratio thresholds are set by regulators and change — verify current figures at osfi-bsif.gc.ca, cmhc-schl.gc.ca, and canada.ca (FCAC), and refer clients to a licensed mortgage professional and lawyer.