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How Our Mortgage Calculator Can Help You Plan For The Future
When you apply for a mortgage, your mortgage payments will be based on a lot more than just your loan amount and the interest rate. There are so many factors involved in coming up with exact mortgage payment amounts that it can be extremely challenging to figure it out manually.
That’s exactly why we’ve created this mortgage calculator, to help you determine exactly how much you can expect to pay in monthly mortgage payments, overall interest throughout the life of the loan, and the total loan amount owed when all is said and done. Just plug in a couple of numbers to get the answer you need to help make sure you’re ready to become a homeowner.
But in addition to our mortgage calculator, let’s go over important factors that affect your mortgage.
How To Determine Mortgage Affordability
In order to determine how much you can afford in terms of a mortgage, you’ll need to factor in a number of components, including the following:
- Annual household income (before taxes)
- Down payment amount
- Mortgage interest rate
- Current monthly expenses
Your income obviously plays a key role in how much house you can afford, but there are so many other factors that can determine whether or not you can afford a certain house at a certain price. Your debt load will take away from your income, for example, while a large down payment can allow you to potentially take out a larger loan.
Of course, the interest rate will also factor into the equation and will determine how affordable your mortgage will be. Even a fraction of a point can mean the difference between thousands of dollars over the life of the mortgage.
Mortgage Term vs. Amortization Period
It’s common for homebuyers to confuse the mortgage ‘term’ and ‘amortization’. But in fact, they’re completely different.
Term – The mortgage term is the amount of time that you are committed to your current mortgage contract with your lender. You’re also committed to the current interest rate and terms of the mortgage during that time period until the term ends. Typical mortgage term lengths are usually five years, though they can be shorter or longer depending on the deal you strike with your lender when you first take out your mortgage.
Once the mortgage term expires, you will either need to have paid off your entire loan amount in full, refinance your mortgage, or renew your mortgage, either with your current lender or a new one. Usually, your new term will have a different interest rate and conditions.
Amortization – The mortgage amortization period is the entire length of time that you have to pay off your mortgage amount in full. In Canada, the maximum amortization period allowed is 25 years, though uninsured mortgages may go as long as 30 years. An uninsured mortgage simply means that at least a 20% down payment was put forth, allowing the borrower to avoid having to pay mortgage default insurance, which we’ll discuss later.
That said, there are also shorter amortization periods given, such as 15 or 20 years. A shorter amortization period means that the entire loan amount must be fully repaid within a shorter time frame. This can be advantageous because it means the borrower will be mortgage-free sooner rather than later.
It also means the total amount paid for the loan will be much less because less interest will have to be paid over the life of the loan. However, the monthly mortgage payments will be higher in order to pay off the loan faster.
A longer amortization period is usually more common among Canadian buyers because they’re more affordable in terms of monthly mortgage payments that are easier to budget for. However, the downfall here is that more interest will be paid over the life of the mortgage. Further, the mortgage will take longer to pay off, which means mortgage payments will be part of the borrower’s debt for longer.
Speak With A Mortgage Specialist
How Do Mortgage Lenders Determine Their Interest Rates?
Mortgage lenders obviously are out to make money on mortgages. It’s why they’re in the business and it’s how they make their money. In order to make a profit, they charge interest on the loan amount. But how exactly do they come up with the rates they charge?
It usually comes down to two things: the prime rate/bond market, and your level of risk as perceived by the lender.
Bond market – Chartered banks use the bond market to determine their mortgage rates. Government of Canada bonds and mortgages are two investments that lenders use to make a profit. Essentially, lenders calculate the interest rates on the money they loan out through mortgages based on the interest rates that they are getting on the capital they have invested.
They then use any anticipated profits from bond investments in order to make sure they’re able to cover the costs or any losses they experience through loaning money through mortgages. If the bond market is more profitable, the mortgage interest rates will be lower, and vice versa.
It should be noted, however, that the bond market affects fixed-rate mortgages. Variable-rate mortgages, on the other hand, are affected by fluctuations in the Bank Rate and overnight rate, which the Bank of Canada sets. Mortgage lenders use the overnight rate to calculate their own prime rate. There’s a direct correlation between the overnight rate and the mortgage interest rate on variable-rate mortgages since the majority of these types of mortgages change along with a lender’s prime rate.
Your risk level – Your lender will assess your risk level before they even agree to loan you funds to buy a home. If you are approved, your risk level will play a key role in the interest rate you’re offered. If you’re low-risk, your rate will likely be lower. But your rate will be higher if you’re considered higher risk.
So, how does your lender determine what risk level you’re at? There are a couple of things:
Your credit score – Your payment history and financial background play a role in your credit score. A higher score paints the picture of a responsible borrower who is diligent with their money, while a lower score says the opposite. The higher your score is, the lower your interest rate will likely be, and vice versa.
Loan-to-value ratio (LTV) – Your LTV is a measure of the loan amount relative to the value of the home you plan to buy. So, if you’re buying a home for $500,000 and you require a loan of $400,000 (after putting down $100,000), your LTV would be 80% ($400,000 divided by $500,000).
A lower LTV will give you more equity in the home and would make you a lower risk for the lender, thereby helping to lower the interest rate you’re offered.
Mortgage Default Insurance 101
There are plenty of things in life that require insurance, and that includes mortgages in many cases. So, how do you know when and if you will need to contribute to a mortgage default insurance policy?
As mentioned earlier, borrowers who are unable to come up with a 20% down payment will be required to pay mortgage default insurance. Also referred to CMHC insurance, this type of policy is paid for by the borrower but is designed to protect the lender in case the borrower ever defaults.
With a smaller down payment comes a higher loan amount, or LTV. That means there’s less equity in the home which also means that the borrower – and the mortgage itself – is riskier. To offset this risk, lenders charge mortgage default insurance premiums to cover them in the event of mortgage default.
In Canada, there are three major mortgage default insurers: CMHC (Canada Mortgage and Housing Corporation, Genworth Financial, and Canada Guaranty. The insurance provider involved will calculate the premium based on a percentage of the loan amount. This percentage is based on the LTV ratio of the mortgage and the premium is either paid upfront in one lump sum or rolled into the mortgage.
Interested in Applying For a Loan?
Mortgages are typically a required part of the buying process, but it’s important to choose the right mortgage product and lender wisely, as it is a huge financial commitment. Apply today and Loans Canada will help connect you with a third-party mortgage specialist.
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
Glossary
| TERM | DEFINITION |
|---|---|
| Add-Ons | Any features or services that are applied on top of the base price of a car are considered add-ons. These can include things such as tinted windows, heated seats, leather seats, alarms, and wheel locks, to name a few. |
| Base Price | The base price of a car is the cost of the vehicle without any upgrades or added features that can be added after the car is ordered from a dealership. Only standard equipment and the manufacturer’s warranty are included in the base price, but any other fees will be added afterward. |
| Certified Pre-Owned (CPO) | CPO cars refer to used cars that have been certified, either by the dealership selling the car or the manufacturer of the vehicle. This gives consumers confidence knowing they are buying a used vehicle that is in good condition. When a used car is obtained by a dealership, it is inspected by a certified mechanic. The car is then repaired if it meets the required standards and is then ready to be sold as a CPO vehicle. |
| Clear Title | A clear title means that the owner of the car has a free and clear title and no longer carries a balance owing on a car loan. There are no liens of the title or levies from creditors. |
| Dealership | Auto dealerships are businesses that are authorized to sell new or used automobiles to consumers and serve as a direct dealer for automakers |
| Dealership Financing | Consumers can obtain dealer financing to help fund the purchase of a vehicle. A contract is signed with a dealership that requires a consumer to pay for a specific amount plus interest and funding fees over a certain period of time. Dealers will send the details of the consumer’s financials to various lenders to find one that will approve the loan. |
| Depreciation | Depreciation refers to the decline in the value of a vehicle. Immediately after purchase, a vehicle will become less valuable as soon as it is used. Put another way, depreciation is the rate at which an automobile loses its value over time |
| TERM | DEFINITION |
|---|---|
| Extended Warranty | Vehicles come with a manufacturer’s warranty when purchased, but buyers can choose to purchase an extended warranty. This serves as a form of insurance policy on the vehicle to cover the cost of potential repairs in the future. An extended warranty is usually good for a certain period of time and/or mileage. |
| TERM | DEFINITION |
|---|---|
| Lease | A contract that allows an individual the right to use or occupy a property for a specified period of time in exchange for a monthly payment. Leases are common for a property like apartments and vehicles. The individual on the lease does not own the asset at the end of the lease’s term, it is strictly for rental purposes. |
| TERM | DEFINITION |
|---|---|
| MSRP (Manufacturer’s Suggested Retail Price) | Car manufacturers will offer recommendations on how much a car should be priced at the retail level, known as the manufacturer’s suggested retail price, or MSRP. The purpose of the MSRP is to standardize pricing in the automobile industry so that there is not a lot of fluctuation in price from one dealership to another. |
| TERM | DEFINITION |
|---|---|
| Title Loan | A title loan uses the vehicle title as a form of collateral to secure a loan. Borrowers must own their vehicles free and clear and no longer owe any amount on a car loan. A lender will place a lien on the car title in exchange for funds. If the borrower defaults on the loan, the lender can take possession of the vehicle and sell it to cover any losses. |
| Trade-in Allowance | A trade-in allowance is the amount that a car dealer will reduce the cost of a new car purchase by after the consumer’s old vehicle has been traded in. It is somewhat like being given credit from the sale of an existing vehicle that is then applied to the purchase of a new vehicle. |
| Trade-in Value | A trade-in value is the amount that dealerships offer consumers for their vehicle and is typically applied toward the purchase price of another vehicle. Dealerships will assess the value of the vehicle and will base the amount that can be applied to a new car purchase. The consumer will then trade in the old vehicle and the assessed value amount will be deducted from the price of another vehicle. Trade-in value is often different than what the vehicle may be worth when sold in the open market. |
| TERM | DEFINITION |
|---|---|
| Vehicle Identification Number (VIN) | Every vehicle will have its own unique vehicle identification number, which is used to identify a specific vehicle. No two vehicles will have the same VIN, making them easily identifiable with this unique 17-character code. |
