Ondaatje was born in Colombo, Sri Lanka, then called Ceylon, in 1943; and is of Dutch, Sinhalese, and Tamil ancestry. His parents separated when he was an infant; he then lived with relatives until 1954 when he joined his mother in England. While in England, Ondaatje pursued secondary education at Dulwich College; he then emigrated to Montreal, Quebec in 1962. After relocating to Canada, Ondaatje studied at Bishop's University in Lennoxville, Quebec for three years. In his final year he attended the University of Toronto where he received a Bachelor of Arts degree in 1965. In 1967, he received a Master of Arts from Queen's University, Kingston, Ontario.

Since the 1960s, Ondaatje has been involved with Toronto's Coach House Books, supporting the independent small press by working as a poetry Editor. Ondaatje and his wife Linda Spalding, a Novelist and academic, co-edit Brick, A Literary Journal, with Michael Redhill, Michael Helm, and Esta Spalding. In 1988, Ondaatje was made an Officer of the Order of Canada (OC) and two years later a Foreign Honorary Member of the American Academy of Arts and Letters. Ondaatje has served on the board of trustees of the Griffin Trust for Excellence in Poetry since 2000.

Ondaatje's literary career began with his poetry in 1967, publishing The Dainty Monsters, and then in 1970 the critically acclaimed The Collected Works of Billy the Kid. However, he is more recently recognized for his nationally and internationally successful novel The English Patient (1992), which was adapted into a film in 1996.

Ondaatje's work includes fiction, autobiography, poetry and film. He has published 13 books of poetry, and won the Governor General's Award for The Collected Works of Billy the Kid (1970) and There's a Trick With a Knife I'm Learning to Do: Poems 1973–1978 (1979). Anil's Ghost (2000) was the winner of the 2000 Giller Prize, the Prix Médicis, the Kiriyama Pacific Rim Book Prize, the 2001 Irish Times International Fiction Prize and Canada's Governor General's Award. The English Patient (1992) won the Booker Prize, the Canada Australia Prize, and the Governor General's Award. It was adapted as a motion picture, which won the Academy Award for Best Picture and multiple other awards. In the Skin of a Lion (1987), a novel about early immigrants in Toronto, was the winner of the 1988 City of Toronto Book Award, finalist for the 1987 Ritz Paris Hemingway Award for best novel of the year in English, and winner of the first Canada Reads competition in 2002.

The Collected Works of Billy the Kid, Coming Through Slaughter and Divisadero have been adapted for the stage and produced in theatrical productions across North America and Europe. In addition to The English Patient adaptation, Ondaatje's films include a documentary on fellow poet B.P. Nichol, Sons of Captain Poetry, and The Clinton Special: A Film About The Farm Show, which chronicles a collaborative theatre experience led in 1971 by Paul Thompson of Theatre Passe Muraille. In 2002, Ondaatje published a non-fiction book, The Conversations: Walter Murch and the Art of Editing Film, which won special recognition at the 2003 American Cinema Editors Awards, as well as a Kraszna-Krausz Book Award for best book of the year on the moving image.

Coming Through Slaughter (1976), is a novel set in New Orleans, Louisiana circa 1900, loosely based on the lives of jazz pioneer Buddy Bolden and Photographer E. J. Bellocq. It was the winner of the 1976 Books in Canada First Novel Award. Running in the Family (1982) is a semi-fictional memoir of his Sri Lankan childhood.

On 11 July 1988, Ondaatje was made an Officer of the Order of Canada which was later upgraded to grade of companion in 2016, the highest level of the order. In 2005, he was honoured with Sri Lanka Ratna by the former Sri Lankan President Chandrika Kumaratunga. Sri Lanka Ratna is the highest honour given by the Government of Sri Lanka for foreign nationals.

Ondaatje's novel Divisadero won the 2007 Governor General's Award. In 2011 Ondaatje worked with Daniel Brooks to create a play based on this novel.

Ondaatje has two children with his first wife, Canadian Artist Kim Ondaatje. His brother Christopher Ondaatje is a philanthropist, businessman and author. Ondaatje's nephew David Ondaatje is a film Director and Screenwriter, who made the 2009 film The Lodger.

In April 2015, Ondaatje was one of several members of PEN American Center who withdrew as literary host when the organization gave its annual Freedom of Expression Courage award to Charlie Hebdo. The award came in the wake of the shooting attack on the magazine's Paris offices in January 2015. Ondaatje and several other hosts felt that while the attack on the office of Charlie Hebdo was reprehensible, the magazine's history of deliberately anti-Islam provocation was not worthy of being honoured.

In 2016 a new species of spider, Brignolia ondaatjei, discovered in Sri Lanka, was named after him.