Notoriously technical and difficult to calculate, figuring out your mortgage interest rate can be confusing, so we’ve compiled a short guide to help you if you’re thinking of buying a property in Canada:
Fixed rate or variable rate mortgage
A fixed rate mortgage is a popular option because homeowners can make the same interest payment each month; protecting them from rate increases. Be aware though, that these mortgages are compounded semi-annually, meaning that if you’re quoted a rate of 6%, it could actually be 6.9% because the numbers are compounded using a mortgage rate less than 6%. Typically, the more a mortgage is compounded, the higher the monthly interest payments will be.
These mortgages also often come with harsh penalties when the term is broken.
For more flexibility, you might want to choose a variable rate mortgage, which fluctuates with the market, and while you’ll still be making the same payment every month, the amount going to interest and that going to your principal, will go up and down.
How can you calculate your mortgage interest yourself?
The following equation can help you figure out your rate of interest, you’ll just need your payment amount and PV factor (the number of months in your mortgage term or your total number of payments):
Determine your principal: PV factor x payment amount
Determine your total payment amount: divide your principal with the total number of payments you’ll be required to make.
You should be left with your total payment amount.
Note that calculations obtained using this equation obviously don’t factor in any other payments, such as insurance premiums and property taxes.
How will you be affected if your interest rate goes up?
Provided you know your current mortgage rate, mortgage payment, amortization period (PV factor) and frequency of payments, you should be able to figure out your payment amount after a rate increase, by using an online mortgage calculator.
Below are definitions of the above terms to help you navigate the calculation process:
- Current Mortgage Rate: This is the existing interest rate you’re paying onyour mortgage loan.
- Current Mortgage Payment: The monthly mortgage payment you make.
- Amortization Period: The number of months (i.e., total amount of payments) there are in your mortgage term.
- Payment Frequency: How often you are making payments towards your mortgage (usually monthly).
Even if you have a mortgage with a variable rate, you can put the figures into a mortgage calculator while accounting for the fluctuating rate of interest.
Working with a financial advisor or mortgage broker can help you make better sense of your mortgage rate and how it’s calculated, and armed with the above information, you can prepare yourself for buying your first Canadian home.