# How is Mortgage Interest Calculated in Canada?

### 23 Aug

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While many homeowners understand how interest and mortgage payments work, there’s something about mortgage interest calculations that can be a bit tricky to understand. This is because mortgage interest calculation is qute technical and difficult to calculate.

Fortunately you should be able to find a mortgage loan calculator online. We’ll go over the equation here, as well as provide some additional information about mortgage interest.

One factor in your mortgage interest calculation is whether you have a fixed-rate or variable-rate mortgage. Many homeowners prefer a fixed-rate mortgage. This means you make exactly the same interest payment each month. This can protect you from any increases in interest – however fixed-rate mortgages often have harsher penalty fees associated when broken.

For those who want some more flexibility, variable rate mortgages fluctuate with the market. You’ll still be making the same payment each month but the amount that goes to interest and the amount that goes to your principal will fluctuate. However, this poses some risk. Those who choose variable rate mortgages often want less harsh penalty fees in case they need to end their mortgage early. Although interest rates can raise suddenly, variable rate mortgages can sometimes end up saving the homeowner money depending on the market.

A fixed-rate mortgage is compounded semi-annually. This means that if you are quoted a mortgage at 6%, it could be 6.9% in actuality as the numbers that are compounded using a mortgage rate that is less than 6%.

It’s important to ask your lender what the effective rate is of your mortgage, because it will often be higher than your quoted rate. Semi-annual compounding simply means that the interest is compounded twice in one year, rather than once. The more often the mortgage is compounded, the higher the interest will be. It’s very important to understand the difference between posted rates and effective rates before you go into a mortgage.

Beware of mortgages that are compounded monthly, or even daily. The rule of thumb is that the more the mortgage is compounded, the higher your monthly interest payments will be.

Yes, it is very tricky, and that’s why many people use a mortgage loan calculator to find out their exact interest rates.

You can calculate your mortgage interest yourself using the following equation. The numbers you will need are your payment amount and your PV factor. The PV factor is the number of months in your mortgage term, or, your total number of payments. To figure out your interest rate:

• Principal=(PV Factor) x (Payment)
• Payment= (Principal) / (PV Factor)

By dividing your principal by the total number of payments you are to make, you’ll end up with the total payment amount. You can also just plug these numbers into a mortgage loan calculator, and let it do the math for you!

These calculations are based purely on the mortgage and do not take into account any other payments, such as insurance premiums and property taxes.

When interest rates go up, homeowners want to know, and should know, exactly how it will affect them and their mortgage payments. As long as you know your current mortgage rate, current mortgage payment, amortization period (PV Factor), and payment frequency, you can put these numbers into an online mortgage loan calculator and easily figure out what your payment will be after a rate increase. Here are some quick definitions of the above terms:

• Current Mortgage Rate: The interest rate you are currently paying towards on your mortgage loan.
• Amortization Period: The amount of months (ie, total amount of payments) there are in your mortgage term.
• Payment Frequency: How often you are making payments towards your mortgage (usually monthly).

If you have a variable rate mortgage, you can still put the above figures through a mortgage loan calculator, just taking into account the fluctuating interest rate. This will tell you how much you are paying monthly towards your principal.

Remember that even though your payment stays the same, it’s the amount that is going towards your principal that changes. You want to have more of your payment going towards your principal as this means you’ll be able to pay off your mortgage faster.

All these factors can make your head spin but it’s important to have a good knowledge of what your mortgage interest payments are. Thes best thing to do, even before applying for a mortgage, would be to speak to a mortgage professional. As we’ve said above, it’s also very important to speak to your lender and learn the difference between the posted rates, and effective rates, so you know just how much interest you’ll be paying.

Even if you just have hypothetical numbers, you can use an online mortgage loan calculator to see what your monthly payments will be. Even though mortgages can be confusing, the better your understanding of mortgage interest rates and calculations, the better you will be able to stay on top of your mortgage payments, and pay off your mortgage more quickly.