Your home is a significant purchase. Most people will need a mortgage to be able to afford the amount of money involved. It makes sense to do your research so you get the best possible mortgage deal. This not only lowers your monthly mortgage payments but also reduces the total amount you pay over the term of the mortgage.
Researching mortgage payments can be very confusing. First, different mortgage products will often have different interest rates. Secondly, even the same mortgage product can use different interest rates. It can change depending on the length of the term and the length of the mortgage amortization period. It also depends on the lender, broker and the territory, so check out what TD Bank or CIBC have on offer and what the best mortgage rates are in, let’s say, Ottawa, Calgary, or the whole of Canada.
Other factors can influence the mortgage interest rate you are charged. These include your perceived level of risk as a buyer and the perceived risk of the property you want to buy.
Figuring out the relevant sums with just an old-fashioned calculator can be confusing. Fortunately, there is an alternative, and that’s to use our calculator. You just enter the relevant details, and it will do all the “mortgage calc” for you. Moreover, there are similar calculators meant to help you with savings, personal debt, personal loans, and life insurance among other things.
This doesn’t just save you a lot of time, potentially frustration. It also ensures that the payment results you see are totally accurate all the time.
How to Use the Mortgage Payment Calculator
Here is a quick guide on how to use a calculator for mortgage payment calculations. There are lots of ways you can make use of a mortgage payment calculator. Here are some of them.
Calculate Your Monthly Payment
This is probably the most obvious use for a mortgage payment calculator. You calculate the amount you need to borrow. Then you look at the various deals on the market and see which one offers the lowest payment and hence the best value for your money.
Calculate How Much You Can Borrow Based on Your Current Income
You can use a mortgage payments calculator in reverse to work out the amount you could borrow based on the level of payment you want to make. You can even take this a step further and make projections based on what you think the future could hold for you (see also mortgages for the self-employed). This could be a big help with medium to long-term financial planning.
For example, if you’re thinking of having children in the future, then you might want to look at the impact of being able to pay more in the first few years.
If you pay as much as you can towards your mortgage over 5 years or so (even 4 years), it could really open up your payment options further down the line.
Calculate What Impact Your Down Payment Will Have
The more of a down payment you can put together, the less you will have to borrow, and the less you will pay over the term of your mortgage, however long that is. A mortgage payment calculator can help you work out how much of a down payment you will need. So you can borrow the amount you want at a price you can comfortably afford.
Calculate the Real-World Difference Between Different Mortgage Products
Whatever mortgage you choose, it should fit into your overall financial plans. For this to happen, you need to look at the details of each product and think about what they mean in real terms.
For example, some people might prioritize paying as little interest as possible. Even if it means they have less disposable income. They might aim to pay off their mortgage in 15 years (or perhaps 10 years) instead of 20 years or 25 years.
Other people might be prepared to accept paying a bit more interest overall. But only if it left them with more payment flexibility in the short to medium-term.
Either way, you’ll only know where you stand if you run the numbers, and a mortgage payments calculator makes that task a lot easier.
How Your Mortgage Payments Can Be Lowered
There are three main ways to lower your monthly mortgage payment. They are: reduce the amount you borrow, improve your credit score and get the best mortgage deal you possibly can.
Reduce The Amount You Borrow
There are two main ways to reduce the amount you borrow. If you are buying a new property, you can make the maximum down payment you can possibly afford. If you’re already living in a property, you can take out a new mortgage to cover the amount you still owe your existing lender. This allows you to benefit from the equity you have built up in the property plus any increase in property prices.
Improve Your Credit Rating
Lenders use your credit rating to determine how safe or risky it is to lend money to you. Various factors influence it, but most of them hinge on how well you’ve used credit in the past and how well you appear to be using it now. There are three important steps you can take to improve your credit rating before applying for a mortgage.
Check Your Credit Records For Mistakes
Most credit records are accurate most of the time. Sometimes, however, mistakes can be made, and if they are, you want them sorted before you apply for a mortgage.
Close Down Any Credit Accounts You Don’t Use
If you don’t use a credit product, formally close it. This will show that you no longer have potential access to the credit. It will also mean, after a certain time, your details will be deleted from the lender’s database. This makes you less vulnerable to data theft. Similarly, if you have accounts where you just owe a small amount, make them a priority for payment so that you can close them as quickly as possible.
Keep Well Below Your Limit on Credit Cards/Overdrafts
You want to give lenders and brokers the impression that you’re using credit for convenience rather than desperation. If you regularly owe close to the maximum amount on your credit card, this may be seen as a red flag. Additionally, be sure to make your full minimum payment on time no matter what.
Get The Best Possible Mortgage Deal
Increasing your down payment and/or improving your credit rating will help to make you a more attractive customer. This will improve the selection of mortgage products available to you. It’s then down to you to pick the right mortgage product for your needs and wants. A mortgage payment calculator can come in very useful here.
How To Calculate Mortgage Payments
By far, the easiest way to calculate mortgage payments is to use a mortgage payment calculator. This will do all the payment math for you. If you really want to calculate your mortgage payments by hand, there is a formula.
Here is the payment-calculation formula for a repayment mortgage.
P * (I/N) * (1 + I /N)^N(A)] / (1 + I/N)^n(A) – 1
P is the principal; this is the technical term for the amount borrowed.
I is the annual interest rate on the mortgage. This is often very different from the APR because most people pay their mortgage once a month rather than once a year.
N is the number of payments you make each year, so usually 12
A is the amortization period; this is the technical term for the length of time it will take you to pay off your mortgage. In Canada, this will generally be a maximum of 25 years.
The symbol ^ means “to the power of”. You should see it on a scientific calculator.
The payment calculation is the same regardless of whether you have a fixed-interest-rate mortgage or a variable-interest-rate mortgage.
With a variable-interest-rate mortgage, your calculation will only be valid for as long as the interest rate remains valid. When the interest rate changes, you’ll need to do your mortgage sums again.
Remember Fixed-Rate Deals Are Usually Time-Limited
Fixed-rate deals are generally issued on a short-term basis. This term may be as short as 1 year, but it may be possible for you to get a longer-term mortgage fix such as for 3 years, 4 years or 5 years. Your mortgage contract will specify what happens when the fixed-rate period comes to an end. Usually, you will be transferred to a variable-rate mortgage. You can, however, look for an alternative fixed-rate mortgage.
Think Carefully Before Signing Up for a Mortgage with an Introductory Rate
Lenders sometimes offer borrowers the chance to have an extra-low interest rate at the start of their mortgage term. But they will move to a higher-rate after an agreed period. This allows borrowers to absorb the impact of purchase and moving costs before they have to start paying their mortgage at a higher rate.
This can be very useful, but it’s important to do your sums carefully. You need to be absolutely sure that you will be able to afford your mortgage payments when they go up to a higher rate.
Also, be clear about what exit penalties will apply if you want to move to another lender (or even another mortgage product with the same lender). In short, make sure the introductory offer is worth it before you sign up for it.
FAQs
Here are some frequently asked questions about mortgages.
What is the Mortgage Amortization Period?
The mortgage amortization period is the length of time it takes a borrower to pay back the amount borrowed. Since 2012, any mortgage covered by CMHC insurance must have a maximum amortization period of 25 years.
If, however, you can make a down payment of more than 20%, you will be classed as having a “low-ratio mortgage”. These are outside CMHC rules and hence can have an amortization period of longer than 25 years. Assuming you can make the necessary down payment, it is still fairly easy to find a mortgage with an amortization period of 30 years.
Why is the Mortgage Amortization Period Important?
The amortization period is important because it will go a long way to determining how much interest you pay over the course of the mortgage. This is due to the way your monthly payment is processed by the lender.
When a lender offers you a mortgage, they calculate how much interest you should pay over the lifetime of the mortgage. (assuming the interest rate remains the same). They then add this to the loan amount and divide the result by the number of payments you need to make. This gives you the security of knowing you have a baseline for your monthly payment.
When you make your mortgage payment each month, the lender takes their interest (and fees and charges) first. The rest of your payment goes to reducing the amount you borrowed. The more you can put towards your monthly mortgage payment, the quicker you will reduce the amount you borrowed. Eventually, it will mean you pay less interest overall.
Assuming the loan amount and interest rate are the same. A mortgage with a shorter amortization period will work out cheaper overall when compared with a mortgage with a longer amortization period. This is because more of the monthly mortgage payment will go towards paying off the amount borrowed than paying the lender interest.
What is a Low-Ratio Mortgage?
Mortgages are described in terms of the “loan-to-value” ratio. The loan is the amount borrowed or the mortgage, and the vehicle is the lender-approved value of the house. This may or may not be the sales price, but it is the amount the lender will use to judge the amount they will lend the borrower.
Higher loan-to-value ratios are riskier for the lender. They mean that if house prices fall, even temporarily, a lender may not be able to recoup all the money they lent if the borrower defaults on the mortgage. By contrast, lower loan-to-value ratios give the lender more protection if the home needs to be sold to pay off the remainder of the mortgage. This is one of the reasons why lenders generally prefer borrowers who can make a large down payment.
What is the Mortgage Term (and how is it different from the amortization period)?
The mortgage term is the length of time you are committed to your contract with the mortgage lender. You can think of it as a “lock-in period”. You may be able to exit the contract, but you can expect there to be a penalty payment for doing so.
The mortgage term is often only a small part of the mortgage amortization period. For example, you may be committed to your contract with a lender for 3 years to 5 years, but have a mortgage amortization period of 25 years. This means that after 5 years, you can look for a better mortgage deal and you might choose to change your mortgage amortization period too.
The Bottom Line
Calculating mortgage interest manually is possible but complicated. Fortunately, you can use a calculator to make it easy. It’s really important to understand how much you’re paying for your mortgage. It can make a huge difference to your overall finances.
Knowing how much a mortgage will cost involves more than “just” knowing the interest rate, although this is, of course important. It’s also about understanding the importance of the amortization period.
In simple terms, the longer you take to pay your mortgage, the more money you are going to end up paying your lender. From a purely mathematical perspective, the quicker you can pay off your mortgage, the more you will benefit financially.
That said, you still have to be confident you can make your payment each month. This means some people may prefer to have longer mortgages, possibly with the option to make an extra payment whenever they wish.
If you have less than 20% down payment, then your mortgage will have to be insured by CMHC or a private insurance company. Insured mortgages have specific rules, such as being restricted to a maximum of 25-year amortization. If, by contrast, you can afford to make a more significant down payment, then you will be able to take out a “low-ratio mortgage” and this can potentially allow for a longer amortization.
