In Canada loan interest on your mortgage is compounded semi-annually unlike the United States where calculation is done monthly. The method used for loans in Canada gives borrowers a slightly lower monthly payment given the same principal, term and nominal interest rate.
This can make figuring out your monthly payments a little trickier. First you must calculate the semi-annual interest and convert it to a monthly rate. Online calculators are easy to find online or you could apply the formula explained below.
If the nominal interest rate is R ( expressed as a decimal rather than recent ) the monthly rate is
( 1+R/2 ) 1/16 – 1
For example if the annual interest rate is R = 0.666 ( 6.6% ) then the monthly rate is
( 1 + 0.33 ) 1/16 – 1 = 0.00542587 ( equivalently 0.542587 % )
Calculating Monthly Payments And Total Interest
If the monthly interest is i ( as a decimal ) the number of years N, and the principal P then the monthly payment is given by the following equation
Monthly payment = P ( 1+ i ) 12 N/ [ 1.00542587 ) 240 -1 ]
For example suppose you borrow $100,000 for 20 years at a nominal rate of 6.6%. Your three variables are P = 100,000, N = 20, and i = 0.0542587 your monthly payments are
$ 100,000 ( 0.0542587 ) (1.00542587 ) 240/ [ (1.00542587 ) 240 -1 ]
= ( 542.587 ) ( 3.664488 ) / ( 2.664488 )
= $ 746.22
The total interest paid is the difference between the sum of all the monthly payments and the amount borrowed. As an example if you pay $746.22 a month for 20 years and the amount borrowed is $100,00 then the total amount of interest is
$746..22 ( 240 ) – $100,000 = $79, 092.80
This all might sound a little confusing like a new language although it is a good idea to be aware of the total cost of borrowing over the number of years you are borrowing to purchase a home. Meeting with a Toronto mortgage broker like myself, will help you understand how interest is calculated and will work to get the best rates and terms which could save you money over the long term.
When you need sound mortgage advice in Brampton or Toronto, contact me today and let me help you.
