How Is Mortgage Interest Calculated In Canada? on February 1, 2021 One of the biggest purchases of most people’s lives is a home. But it’s surprising how many people don’t actually understand the basics of mortgages and mortgage rates. How is mortgage interest calculated in Canada? How do mortgage interests work? These are questions that most people have never had to answer. Understanding mortgage rates can take some research, and because a home is such a big purchase, it’s research that’s well worth the time invested. If it’s your first time purchasing a home, speak to a team member at Mortgage Assist. A Mortgage Assist solution has been known to be very useful for those that might need some additional help when purchasing a home. When it comes to mortgages, the interest rate is the largest factor. The interest rate is what you’ll be paying once your loan has been confirmed. What Are Interest Rates? An interest rate can basically be thought of as the price of money. When you apply that to a mortgage, it’s the price of money borrowed for the home you’re wanting to purchase. Interest rates are what’s used in order to calculate how much someone will be paying to borrow a sum of money for the mortgage. People always want to get the best interest rate when shopping around for a mortgage. A home is a long-term investment, and the mortgage rate will be sticking around for a while. How Is Interest Calculated On A Mortgage? How is interest calculated? What is the mortgage interest formula? How are interest rates calculated? When you visit your mortgage broker, they should be going over these questions with you in a clear and concise way so that you fully understand how your payments will be set up. Capitalization on mortgage rates is done on a semester basis. If you look at an example of a 3% fixed annual rate, you’ll want to figure out your periodic rate and actual annual rate. Capitalization happens two times per year, and there are a few formulas for figuring out the period rate. The 3% example would look like this: 3% / 2 = 1, 5%. Taking capitalization into account, the annual rate looks like this: 1+ rate per period of capitalization) capitalization periods in total – 1 = the actual annual rate. This example would lead to (1+1,5 %) 2-1 = 3,0225%. Because payments are either done monthly, which results in 12 payments per year, bi-monthly which leads to 24 payments a year, or bi-weekly which leads to 26 times a year, there need to be adjustments depending on the frequency of payments. If you’re on a monthly payment schedule, you’ll calculate the period rate like this: 1 + 3,0225 %) 1/12-1 = 0,248452%. With this example, all of the payments you’ll be making will be directed to the 0,248452% of the interest that’s on the balance. The remainder of the payments will be directed at lowering the capital, which is the total of the loan. As you put money towards the mortgage, a smaller amount of the entirety of the payment will be going to the interest, and the larger portion will be increasing the capital. If you decide you want to add another payment to your mortgage schedule, your capital will be reduced. As a result, the portion being directed to the interest will be lowered, as well. Ensure that you follow all of the guidelines laid out for you in your mortgage contract. Fixed-Rate And Variable-Rate Mortgages There are typically two types of interest rates on mortgages. Fixed-rate mortgages will have an interest rate that won’t fluctuate for the duration of the mortgage. Variable-rate mortgages do have interest rates that can go up or down, and this is determined by the market indexes. Interest on a mortgage can significantly add up over time, almost to the point where it costs the same as the total of the mortgage. All of the associated fees, interest payments, and points are known as the annual percentage rate (APR). If you’re wondering how to even get the mortgage process started, you’ll need to get pre-approved. The first step in getting pre-approved for a mortgage is visiting your bank and letting them know that you’re wanting to purchase a home. They’ll ask for a bunch of details surrounding your current financial situation. If you do get pre-approved, you’ll receive a loan estimate document. This document will lay out details on the mortgage amount that you’re qualified for and any other associated costs. It’ll also show the interest rate for the mortgage. Learning how mortgage interest works can be a confusing topic for many people that have never had to understand it before. Once you do take a closer look at it, you’ll see that it’s not all that complicated on the surface.