Choosing a mortgage in Toronto: fixed, variable, term, amortization and insurance
Rate is only one of five decisions you make when you take a mortgage. The others — fixed or variable, the length of the term, the amortization, and whether the loan is insured — change your payment, your flexibility and the penalty you will face if life changes before the term ends. Here is how each plays out for a Toronto buyer.
Fixed or variable
A fixed rate locks your payment for the term. A variable rate is set as prime minus a discount and moves with the Bank of Canada’s overnight rate. Historically variable has cost less over most five-year windows, but 2022 showed the other side: prime rose from 2.45% to 6.95% in eighteen months. Two things tip the choice. First, the penalty: breaking a variable costs three months’ interest; breaking a fixed can cost an Interest Rate Differential many times larger. Second, your horizon: if there is a real chance you sell, refinance or move within the term — common in Toronto’s condo-to-house progression — the variable’s small penalty is worth a lot.
Term: one to ten years
The term is the length of your contract, after which you renew at a new rate. Five years is the Canadian default and usually carries the best fixed pricing. Shorter terms (1–3 years) let you re-price sooner if you expect rates to fall, at the cost of renewing more often. Ten-year terms exist but are rarely competitive. One rule to know: after five years of any term, the Interest Act caps the prepayment penalty at three months’ interest, which makes a seven- or ten-year fixed cheaper to break than it looks.
Amortization: 25 or 30 years
Amortization is the total repayment period and sets the payment size. Insured mortgages (under 20% down) are capped at 25 years, except first-time buyers and buyers of newly built homes, who can take 30 years since December 15, 2024. Uninsured mortgages can go to 30 years at most lenders, sometimes 35 at alternative lenders. On $800,000 at 4.5%, 25 years costs about $4,450 a month and 30 years about $4,050 — but the 30-year borrower pays roughly $125,000 more interest over the life of the loan. Most Toronto buyers choose the longer amortization for qualifying room and use prepayment privileges to shorten it.
Open or closed, and prepayment privileges
Closed mortgages have lower rates and limited prepayment: typically 10–20% of the original principal per year as lump sums, plus the right to raise the regular payment by a similar percentage. Open mortgages can be repaid in full any time without penalty but cost 1–2 points more — worth it only for a few months, for example when you have sold one home and will close on another soon. Read the prepayment clause: a 20/20 privilege lets a disciplined borrower cut years off a 30-year amortization without ever refinancing.
Insured, insurable and uninsured
Under 20% down, the mortgage must be insured (CMHC, Sagen or Canada Guaranty), the price must be under $1.5 million, and the premium — 2.8% to 4.0% of the loan — is added to the balance. Between 20% and 35% down on a home under $1.5 million, the mortgage is “insurable”: the lender may insure it at its own cost and will often pass on the best rates. Above $1.5 million, or on refinances and rental properties, the loan is uninsured and lenders price in slightly more risk. Because so much of Toronto’s freehold market sits above $1.5 million, most detached and semi buyers are in the uninsured bucket by default.
Bank, monoline, credit union or broker
The big banks offer convenience and blend-and-extend options but calculate IRD penalties from posted rates. Monoline lenders (accessible through brokers) often have lower rates and far smaller penalties but no branch. Credit unions are provincially regulated, so they are not bound by the federal stress test and can be the answer for self-employed or borderline files. A mortgage broker shops all three at no cost to you — the lender pays them.
Rules cited: Interest Act s.10; Department of Finance insured-mortgage rules (effective December 15, 2024); CMHC premium schedule; OSFI Guideline B-20; Bank of Canada policy-rate history (2022–2023). Illustrative — confirm with a licensed mortgage professional.