Mortgage Rate Calculator

Diving into the world of mortgages can be daunting, especially if you’re new to the process. 

While you can use mortgage calculators to get a quick view of your potential monthly mortgage payment, there are a lot more variables to consider before you sign on the dotted line. 

For example, have you considered closing costs or other debt obligations? What about choosing a fixed vs variable interest rate? Will you need mortgage default insurance? What does your ideal mortgage payment schedule look like? What are the current mortgage interest costs vs the mortgage principal?

All of these factors are smaller pieces of the mortgage puzzle, and they can fit together in many different ways to affect the overall cost of buying a home or property. Read on to get a better understanding of the mortgage process, so you can make an informed decision on the mortgage that’s right for you.

How Do Mortgages Work?

A mortgage is a loan given by a lender (usually a bank or specialty mortgage lender) in order to help a person or business to buy real estate. The borrower will contribute some money (the down payment) and the lender will cover the rest (the mortgage). 

The required minimum down payment is 5% for homes under $500,000. For homes above that price, the minimum down payment is 5% for the first $500,000, and 10% for the portion above that amount. Homes over $1,000,000 require a minimum down payment of 20%. Mortgage insurance – also known as CMHC insurance – must be purchased for down payments between 5% and 20%.

The home itself acts as collateral for the large amount of money that will be borrowed. This means that if the borrower stops paying the mortgage, the bank or lender can foreclose on the property and lawfully take it from the borrower.

The borrower repays the loan, plus interest, over a specific number of years (typically 25 years, though it can be shorter or longer depending on certain conditions) until they own the property. This is referred to as the amortization period. 

In Canada, the maximum amortization period for a down payment under 20% is 25 years, and for a down payment higher than 20%, it is 35 years.

Principle vs. Interest

It’s important to understand that a mortgage is made up of two different figures: the principle and the interest.

• The mortgage principal is the original amount of money borrowed from the lender to purchase a home. It is the loan amount that must be repaid over time.
  
  
• Interest is the cost of borrowing money, expressed as a percentage of the principal. It is essentially the fee paid to the lender for the loan. The interest rate, combined with the mortgage principal amount, will determine the overall interest paid.

Each mortgage payment includes a portion that goes towards reducing the principal balance. Early in the mortgage term, a smaller portion of the payment goes towards the principal, with a larger portion going towards interest. Over time, this shifts, and more of each payment goes towards paying down the principal.

Interest is calculated based on the remaining principal balance. At the beginning of the mortgage term, because the principal balance is higher, the interest portion of each payment is larger. As the principal balance decreases over time, the interest portion of each payment becomes smaller.

What Affects Your Mortgage Approval?

While you might plug some numbers into our mortgage payment calculator and determine you’re good to go, lenders will take a look at several factors to determine your eligibility for a mortgage loan.

• Credit Score: Higher credit scores indicate lower risk to lenders and increase the likelihood of mortgage approval. Scores above 680 are generally considered good, while scores below this may require additional scrutiny or result in higher interest rates.

• Income and Employment History: Lenders prefer borrowers with a stable and sufficient income to cover your monthly payment. This is usually verified through pay stubs, employment letters, and tax returns. A stable employment history with the same employer or within the same industry is seen favorably. Self-employed individuals may need to provide additional documentation, such as business financial statements.

• Down Payment: You must have at least 5% of the purchase price saved to qualify for a mortgage loan. Use our mortgage payment calculator to see how much you would qualify for based on your current savings. Lenders will also want to ensure that the source of your down payment is from valid savings, and isn’t borrowed or loaned from elsewhere. You need to prove that you’re able to save money in order to qualify for a mortgage loan.

• Mortgage Stress Test: All borrowers must pass a mortgage stress test to ensure they can afford payments at a higher interest rate. The stress test rate is the higher of the Bank of Canada’s five-year benchmark rate or the lender’s rate plus 2%. This test affects the amount you can borrow and may limit your purchasing power and the final purchase price of your home.

• Existing Debt and Liabilities: High levels of existing debt can negatively impact mortgage approval. Lenders assess whether you can manage additional debt based on your current obligations. Other financial obligations, such as child support or alimony, are also considered in the approval process.
  
  
• Savings and Assets: Having additional savings and assets can improve your approval chances, as it demonstrates financial stability and provides a cushion in case of financial difficulties.

What Impacts Mortgage Rates?

The Bank of Canada will raise or lower its key interest rate in order to keep inflation as low and predictable as possible. This is called the prime rate.

The prime rate is what banks and mortgage lenders use to set the rates on their variable rate mortgage products. A variable rate is quoted in relation to the prime rate; for example, a 6.35% 3-year variable rate would be (prime – 0.85%)

Fixed vs. Variable Mortgage Rates

There are different types of mortgages, and the most common you’ll see is fixed-rate vs. variable-rate.

• Fixed-Rate Mortgages: The interest rate remains the same throughout the term, providing stability in monthly payments.
• Variable-Rate Mortgages: The interest rate fluctuates with the prime lending rate, which can result in varying monthly payments.

There are pros and cons to both options, and what you choose will depend on your specific circumstances.

• Fixed Mortgage Rate: Your rate is locked in for the entire mortgage term, even if the market rate changes. This means your monthly mortgage payments will be the same every month, even if the market rate falls.
• Variable Mortgage Rate: Your rate adjusts if the market rate changes. This means your monthly mortgage payments would decrease if the market rates fall during your mortgage term. However, if the rate rises, your monthly mortgage payments will increase.

Should I Increase My Mortgage Payment Frequency?

Increasing your mortgage payment frequency can be a strategic move that offers several benefits, but it also requires careful consideration of your financial situation and goals.

Benefits of Increasing Mortgage Payment Frequency

• Reduced Interest Costs: More frequent payments reduce the principal balance faster, which in turn reduces the amount of interest you pay over the life of the loan. This is because interest is calculated on the remaining principal, so the more often you reduce it, the less interest accrues.
  
  
• Compounding Effect: With bi-weekly payments, for instance, you end up making the equivalent of one extra monthly payment each year (26 bi-weekly payments instead of 12 monthly), further accelerating principal reduction and interest savings.

• Shortened Amortization Period: Increasing payment frequency can significantly shorten the time it takes to pay off your mortgage. This means you build equity in your home more quickly and become debt-free sooner.
  
  
• Regular Payments: More frequent payments can help with budgeting and financial planning, as it creates a regular outflow that may be easier to manage for some people, especially if it aligns better with their pay cycles.

Potential Drawbacks

• Budgeting: More frequent payments require careful cash flow management. You need to ensure that funds are available for each payment period.
  
  
• Potential Strain: If your income is not received frequently (e.g., monthly salary), aligning mortgage payments with income can be challenging.

• Increased Total Monthly Outlay: Even though the payments are smaller, the total monthly outlay can be higher with more frequent payments, which may be challenging if your budget is tight.

• Check Your Mortgage Terms: Some mortgages have prepayment penalties or limits on how much extra you can pay each year. Ensure you understand your mortgage terms to avoid any penalties.
• Alternative Investments: Extra money directed towards mortgage payments might yield higher returns if invested elsewhere, depending on current mortgage rates and investment opportunities.

Considerations Before Increasing Payment Frequency

• Financial Stability: Ensure you have a stable income and can comfortably manage the increased payment frequency without affecting your other financial obligations.

• Emergency Fund: Maintain an adequate emergency fund to cover unexpected expenses, ensuring that increased mortgage payments do not compromise your financial security.

• Mortgage Terms and Conditions: Review your mortgage agreement to understand any restrictions or penalties associated with increased payment frequency.
  
  
• Long-Term Financial Goals: Align your mortgage payment strategy with your overall financial goals, including retirement savings, investment plans, and other major expenses.