How the Canadian Mortgage Calculator Works
Mortgages in Canada work a little differently from mortgages in the United States, and a calculator built for the U.S. gives the wrong payment for a Canadian loan. The Canadian Mortgage Calculator follows the Canadian rules: interest on a fixed-rate mortgage is compounded twice a year, you can pay weekly or every two weeks, and a small down payment brings default insurance. It also separates the amortization, which is how long the whole mortgage would take to pay off, from the term, which is how long your rate lasts before you renew.
What you enter
- Home price and down payment: the price, and the cash you put down.
- Interest rate and type: a fixed rate is compounded twice a year. A variable rate is compounded monthly.
- Amortization: the total time to pay off the mortgage, often 25 or 30 years.
- Term: the length of your current rate, often 5 years. When the term ends, you renew at the rate then on offer.
- Payment frequency: monthly, twice a month, every 2 weeks, weekly, or the accelerated versions of the last two.
Why Canadian mortgages compound twice a year
By law, the stated rate on a fixed-rate Canadian mortgage is compounded semi-annually, which means twice a year. But the payments are usually monthly, so the calculator first converts the rate into the equivalent rate for each payment period:
rate per payment = (1 + yearly rate / 2)^(2 / payments per year) - 1
Then it uses the standard loan formula, where P is the mortgage, i is that rate, and N is the total number of payments:
payment = P x i / (1 - (1 + i)^-N)
On a $480,000 mortgage at 5% over 25 years, this gives $2,791.70 a month. A U.S. calculator, which compounds monthly, would show $2,806.03, which is $14.33 too much every month.
Default insurance
If your down payment is less than 20% of the price, your lender requires mortgage default insurance. The premium is a percentage of the loan that depends on how much you borrow compared with the price (the loan-to-value ratio, or LTV). It is usually added to the mortgage:
| Loan-to-value | Premium |
|---|---|
| 65% or less | 0.60% |
| 65.01% to 75% | 1.70% |
| 75.01% to 80% | 2.40% |
| 80.01% to 85% | 2.80% |
| 85.01% to 90% | 3.10% |
| 90.01% to 95% | 4.00% |
An amortization longer than 25 years adds 0.20 points. The minimum down payment is 5% of the first $500,000 of the price, plus 10% of the part above that. Homes at $1.5 million or more need at least 20% down. These rules and premiums change, so check with your lender or the CMHC website.
For example, on a $450,000 home with 5% down ($22,500), the loan is $427,500 and the LTV is 95%, so the premium is 4%, or $17,100. It is added to the mortgage, which becomes $444,600, and the payment is $2,585.82 a month.
A worked example
You buy a $600,000 home with 20% down ($120,000), so there is no insurance. The mortgage is $480,000 at a fixed 5% over 25 years, with a 5-year term and monthly payments.
| Result | Amount |
|---|---|
| Payment each month | $2,791.70 |
| Effective yearly rate | 5.0625% |
| Total interest over 25 years | $357,511.18 |
| Interest in the first 5-year term | $112,338.27 |
| Still owed at the end of the term | $424,836.03 |
After 5 years of payments, you have repaid only about $55,000 of the $480,000. At renewal, you will have $424,836 to renew at the new rate.
Chart: what you still owe
Start ████████████████████████████████████████ $480,000 Year 5 ███████████████████████████████████ $424,836 Year 10 ██████████████████████████████ $354,222 Year 15 ██████████████████████ $263,830 Year 20 ████████████ $148,120 Year 25 (paid off)
Payment frequency and accelerated payments
Paying more often can save interest, and accelerated payments save the most. An accelerated payment takes the monthly payment and divides it by 2 (every 2 weeks) or by 4 (weekly). Because there are 26 two-week periods, or 52 weeks, in a year, you end up making the equivalent of one extra monthly payment each year. On the example:
| Payments | Each payment | Paid off in | Total interest |
|---|---|---|---|
| Monthly | $2,791.70 | 25 years | $357,511 |
| Twice a month | $1,394.42 | 25 years | $356,649 |
| Every 2 weeks | $1,287.05 | 25 years | $356,583 |
| Every 2 weeks, accelerated | $1,395.85 | 21 years 6 months | $299,493 |
| Weekly | $643.22 | 25 years | $356,186 |
| Weekly, accelerated | $697.93 | 21 years 6 months | $298,834 |
Ordinary bi-weekly or weekly payments barely change the total interest. The accelerated ones pay the mortgage off about 3.5 years sooner, and save about $58,000 of interest.
Good to know
- Your payment is set for the whole amortization, but the rate is only set for the term. At renewal, the payment can change.
- Fixed rates and variable rates are compared over the term, not over the whole amortization.
- Most lenders let you make extra payments, or a lump sum each year, without a penalty. Ask about your limits.
What this calculator does not include
- Land transfer tax, legal fees, and the provincial sales tax charged on default insurance in some provinces.
- Property tax, heating and condo fees.
- The stress test that lenders use when they decide how much you can borrow.
- Prepayment charges if you break the mortgage before the end of the term.
This tool gives an estimate for general information only. It is not financial advice or a mortgage approval. Your lender can give you exact figures.