How do I use the mortgage calculator?
At the minimum, to calculate your mortgage payment, begin by entering the purchase price of your home, the down payment amount, interest rate, and amortization period. The mortgage calculator will automatically update your results as you enter new information.
Most Canadians choose to make monthly mortgage payments, and the calculator defaults to a monthly payment frequency. You can, however, experiment with different payment options such as weekly, bi-weekly, semi-monthly, accelerated weekly or accelerated bi-weekly payments to see how your mortgage payment would change under these different conditions.
What's the difference between amortization and mortgage term?
Amortization is the number of years you expect to pay off your mortgage in full. It's used to calculate your mortgage payments. The longer the amortization period, the more interest you'll have to pay in total on your mortgage.
A mortgage term is the amount of time you will be committing to a specific mortgage lender and the interest rate they're offering you. It's a contract that says that you'll stick with a particular mortgage lender for a period of time. After your mortgage term is up, you are free to renew your mortgage with another lender or stay with your current lender. Typically, in Canada, the average mortgage term is 5 years, and most interest rates are fixed.
What interest rate should I use in the mortgage calculator?
The interest rate you use in the calculator can have a significant effect on your mortgage payment. To get an accurate assessment of your payments, use an interest rate that most accurately represents the interest rate you could borrow at given current market conditions.
What is mortgage insurance?
Mortgage insurance, also known as mortgage default insurance, exists to protect the mortgage lender, should the mortgage borrower stop making payments on their mortgage. In Canada, there are three mortgage insurance providers. They are CMHC, Genworth Financial, and Canada Guaranty.
Mortgage insurance is required for all mortgages that have a down payment of less than 20%. Your mortgage insurance premium can be anywhere between 2.8% and 4% of your mortgage, depending on your down payment amount. Quite often, it is the borrower who pays the insurance premiums, not the lender.
In the mortgage payment calculator, if your down payment is less than 20%, the mortgage insurance premiums will already be included in your mortgage payment.
What is CMHC insurance?
The Canadian Mortgage and Housing Corporation (CMHC) is a Canadian crown corporation that regulates the Canadian housing and mortgage markets. They have mandated that all mortgages that have a down payment of less than 20% must have mortgage default insurance (The minimum down payment is 5%). Mortgage default insurance helps to protect your mortgage lender if you cannot make your mortgage payments.
There are three primary providers of mortgage insurance in Canada, with CMHC being the biggest one. That's why you'll find that "CMHC insurance" and "mortgage insurance" are often used interchangeably.
You can choose to pay your CMHC insurance (or mortgage insurance) premium as a lump sum or spread out over the life of your mortgage as part of your mortgage payments. The mortgage payment calculator includes CMHC insurance in your mortgage payments.
How is a mortgage payment calculated?
Your mortgage payment is determined by the mortgage principal amount (the amount of money you borrow), the interest rate on your loan, the amortization period, and the payment frequency. Let's breakdown what these individual pieces mean:
- Mortgage principal amount – Your mortgage principal amount is determined by taking the total purchase price of your home and subtracting your down payment. The difference is the loan amount you will receive to purchase your home.
- Interest rate - The interest rate is a percentage of the total mortgage principal that your lender will charge you for lending you the funds
- Amortization period - The amortization period is the total length of time it would take you to pay off your mortgage. The longer the amortization period, the more interest you will be charged since the lender is servicing you with that loan over a more extended period. The typical amortization period on a mortgage in Canada is 25 years, but it can be longer or shorter
- Payment frequency - Your payment frequency is how often you will make your mortgage payment. Most homeowners tend to make their mortgage payments monthly, but other payment frequency options are available
When you make a mortgage payment, part of it is going towards paying down the mortgage principal (the actual loan amount), and part of it is going towards the interest charged on your loan. Together these make up your mortgage payment. In the payment schedule, you can view how much of your mortgage payment will go towards paying down the principal and how much will go towards the interest.
How can I reduce my mortgage payment?
You can reduce your mortgage payment in several ways, but be aware that reducing your mortgage payment does have its trade-offs. The following are the most common ways you can reduce your mortgage payments:
- Reduce the interest rate – You can find a mortgage that offers a cheaper interest rate. A lower interest rate mortgage means that you will pay less in interest charges over the life of the mortgage
- More extended amortization period – By extending the amortization period, you can reduce your mortgage payment because your payments will be spread out over a more extended period. However, be aware that this approach will increase the total amount of interest you will end up paying over the life of the mortgage
- Put down a larger down payment – You can reduce the size of your mortgage by putting down a more significant down payment on your home. Not only will you start with a smaller mortgage balance to pay off, but you may also save on reduced or eliminated mortgage default insurance costs
How do I get the best mortgage rates?
The interest rate you receive on your mortgage depends on several different factors that largely depend on your financial strength and creditworthiness.
Borrowers with high paying stable jobs with good to excellent credit scores will often get the most competitive interest rates on their mortgages. Borrowers who have a spotty credit history, have lower incomes or work in unpredictable fields will often get higher interest rates.
Mortgage lenders want to see that you have the ability to make your mortgage payments. They want to make sure that their lending to individuals who won't default on their mortgage, even if interest rates were to rise.
Aside from improving your financial situation, you can find better mortgage rates just by comparison shopping and negotiating with lenders. Don't just settle for the first mortgage rate you're offered. You will find that different lenders offer varying interest rates for the same mortgage.
If you'd instead rather leave the negotiating and comparison shopping to someone else, use a mortgage broker who can do the work for you. When using a mortgage broker, be aware that your broker may not have access to all mortgage rates on the market. So using a broker in combination with a mortgage rate search tool is an excellent way to find yourself a great mortgage.
What is the minimum down payment on a mortgage?
The minimum down payment on your mortgage depends on the value of the home you're looking to purchase. It's broken down as follows:
- 5% on the first $500,000 of the home's purchase price
- 10% on the next $500,000 to $999,999 of the home's purchase price
- 20% on the home's purchase price over $1 million
To illustrate how this works, let's assume the purchase price of your home is $800,000. The minimum down payment will be 5% on the first $500,000, which is $25,000. And 10% on the remaining $300,000, which is $30,000. In total, the minimum down payment on your $800,000 home purchase will be $55,000 ($25,000 + $30,000).
What are closing costs?
The closing of a home purchase refers to the last steps before the ownership of the property officially changes. Closing involves lawyers releasing and distributing payments, the title of the home changing, and keys being handed over to the purchaser.
Closing your home purchase also comes with associated costs. Be prepared to pay anywhere from 1% to 4% of your home's purchase price in closing costs. For example, if you purchase a home for $650,000, then you'd want to budget aside an extra $6,500 to $26,000 for closing costs.
Examples of closing costs may include:
- Lawyers' fees
- Land transfer tax (See the land transfer tax calculator for exact costs)
- Home inspection
- Appraisal fees
- Title insurance
- PST on mortgage insurance (in Ontario, Manitoba, and Quebec)
- Other costs such as fire insurance and outstanding utility bills on the home
Your mortgage does not cover these closing costs. It's expected that you pay for closing costs up front in cash. Be sure to budget appropriately for closing costs, as land transfer taxes and other expenses can vary from city to city.