Are you trying to get a mortgage from a lender? Two of the top things you may be considering include the cost of the loan and the amount you can borrow. Before applying for the mortgage, you will see that the lender has advertised a specific interest rate. For instance, the lender may state that they offer a fixed interest rate of 2.19% for two years or a variable interest rate of 2.9% for three years, etc.
Are you trying to understand how mortgage rates work? Do you want to know how lenders set the rate? In this article, we will also cover how the mortgage interest payable is computed. So let’s get started.
“How are mortgage rates determined in Canada?” It turns out that this is a popular question asked by many people. And the first thing to understand is that the Bank of Canada has stated that they don’t control the mortgage rates directly. But The Bank of Canada has an impact on mortgage rates around the country.
The BoC does this by controlling the policy interest rate. Generally, this rate determines the amount of interest major banks and institutions can charge among themselves for lending to each other. It has a remarkable influence on rates for personal loans and mortgages. For instance, if the cost of borrowing is increased, mortgage interest rates, in turn, are increased. Additional factors that influence mortgage interest rates include:
The perceived risk may influence the mortgage interest you pay. See, when the lender gives you a mortgage, two likely scenarios could happen. You can successfully pay off the monthly payments or default on the loan payments and undergo foreclosure. The lender will look at certain factors when assessing your credit risk, including:
Calculating mortgage interest requires that you first know the rate the lender is going to charge you. We recommend checking the rate by applying to as many lenders as possible. This is referred to as shopping around, and it can prove difficult, especially if you are familiar with the market.
Loan Geeks can make it easier for you to get the best rates without even affecting your credit score. We have access to some of the top mortgage brokers in Canada, and you can receive up to 5 quotes simply by filling out the form on this page.
Don’t have what it takes to qualify for a mortgage from a traditional financial institution?
Loan Geeks Can give you access to the private mortgage market in Canada. Private lenders consider consumers with below-average incomes, negative debt-to-income ratios, prior bankruptcies, etc.
You can receive interest rates quotes from these lenders via our private mortgage lenders page.
Before calculating mortgage interest, ensure you know all the terms of the mortgage, for instance:
|Amortization period||15 years|
|Mortgage rate||1.74% 5-year fixed|
Now with this information, just find an easy to use mortgage interest calculator. Plugging in the values will inform you of the expected monthly payment.
For instance, in this example, the monthly payment amount will be $2,367.45 if the interest rate stays consistent until the end of the amortization period.
The actual computation of the monthly payment amount can be done by hand using the following formula:
Monthly payment amount = Principal loan amount [ monthly interest rate (1+ monthly interest rate)^ number of months] / [(1+ monthly interest rate)^ number of months-1]
But it’s much easier to compute using an online calculator.
When the mortgage interest is calculated using fixed terms, there will be a balance after consecutive terms before the new interest rate and amortization period are determined for the rest of the term. For instance, since we chose a 5-year closed rate in the example above, by the end of the first fixed period, we would have made total payments of $142,047.00 and paid a total interest of $27,700.97.
Check out our recommended calculator
Are you looking for a quick solution on how to calculate mortgage interest? Use the free mortgage calculator provided by the Financial Consumer Agency of Canada at the government site here.