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Mortgage math

Monthly payment

Definition

Principal + interest payable each month.

Canadian fixed-rate mortgages are normally quoted with semi-annual compounding. Most lenders let you switch to accelerated bi-weekly or weekly payments to pay the mortgage off sooner.

Your payment is fixed for the term on a fixed-rate mortgage, but how it splits between principal and interest shifts every month — early on, most of it is interest; later, most of it pays down your balance. That's amortization at work.

Switching from monthly to accelerated bi-weekly is a simple way to pay less interest: you pay half the monthly amount every two weeks, 26 times a year, which works out to the equivalent of 13 monthly payments instead of 12. At typical rates that can take a few years off a 25-year amortization.

Because Canadian fixed rates compound semi-annually rather than monthly, a generic monthly-compounding calculator shows a slightly different payment. Our payment calculator uses the Canadian method; your lender's commitment letter is the final word.

Sources

  1. Interest on mortgages (Financial Consumer Agency of Canada)
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Amortization

The total length of time it would take to pay your mortgage off completely if the rate and payments stayed the same. In Canada, insured mortgages (under 20% down) are capped at 25 years, or 30 years for first-time buyers and buyers of new builds; with 20% or more down, the lender sets the maximum (commonly 30 years). A longer amortization lowers the payment but raises lifetime interest.

Equity

The difference between your home's current value and your remaining mortgage balance. Equity is what you can borrow against (HELOC, refinance) or what you keep when you sell.

LTV

Loan-to-Value ratio

Loan-to-value ratio: your mortgage balance divided by the property's value (the lower of purchase price or appraised value on a purchase). 80% LTV means 20% equity. Insured purchases can go up to 95% LTV on homes of $500,000 or less; above that, the 10% down-payment tier lowers the maximum.

Principal

The amount you actually borrowed. Each payment is split between principal (which reduces your balance) and interest. Early years are mostly interest; late years are mostly principal.

Semi-annual compounding

The Canadian convention for fixed-rate mortgages: the quoted annual rate compounds twice a year rather than monthly. At the same quoted rate, semi-annual compounding costs slightly less than monthly compounding, so a Canadian rate isn't directly comparable to a U.S. monthly-compounded one.