When it comes to mortgages, it’s easy to know what your monthly payments are, but understanding the details of mortgage interest can be a bit technical. Fortunately, many online calculators can help you out. That said, it’s still a good idea to know the basics of mortgage interest.
Mortgage interest is a fee you pay to a lender for the use of their money. When you first start making mortgage payments, most of your funds go toward interest. Then, as you approach the end of your mortgage, much of the money is applied toward the principal loan.
Every lender has different interest rate options. For example, you can choose between a fixed rate or a variable rate when you get a mortgage. With fixed-rate mortgages, your interest rate doesn’t change during the term of the mortgage. On the other hand, variable-rate mortgages can fluctuate.
When your mortgage is up for renewal, you will renegotiate the term and interest rate.
The prime interest rate set by the Bank of Canada is arguably the most important factor that determines mortgage interest rates. This number is used by lenders to set their posted interest rates and can change frequently.
Some additional criteria may affect interest rates, including:
As weird as it sounds, there are actually different types of mortgage rates that may affect you in some ways.
What many homeowners don’t realize is that the posted rate is just a sticker price. Sure, you could get a mortgage for that amount right away, but why would you do that when you can negotiate a discounted rate instead?
Many financial institutions are banking on the fact that you may not be aware that discounts are available or you’re too lazy to shop around. However, as a consumer, it’s in your best interest to negotiate your mortgage rate since it could save you thousands of dollars.
There are many mortgage calculators available online that will allow you to quickly calculate what your payments will look like. The info you’ll need is as follows:
Fixed-rate mortgages are compounded semi-annually. That means that the rate you’re quoted is a bit lower than what you’ll actually pay once you factor in compound interest. For example, a fixed-rate mortgage of 6% has an effective annual rate of 6.09%.
With variable mortgages, you make the same payment every month. However, if rates fluctuate, so does the interest portion of your payments. When interest rates rise, more of your payments go toward interest. On the other hand, when rates fall, you’re making larger payments toward the principal. That means you’re paying off your mortgage faster.
Even though mortgage interest rates are posted at every financial institution, there are many ways to lower your rate.
When getting a mortgage, many people focus on getting the lowest interest rate possible, but that shouldn’t be your only priority. Be sure to check all the terms, including any prepayment options, before you commit.
Barry Choi is a personal finance and travel expert. His website moneywehave.com is one of Canada's most trusted sites when it comes to all things related to money and travel. You can reach him on Twitter: @barrychoi.