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How do mortgage payments work in Canada? (with key tips home buyers must know)

“Always pick your yard based on your Summer lifetstyle.”

~ KARL

May 3, 2018 - Karl Yeh

When buying a house, wondering how you pay down your mortgage? How much do you need to pay? How often? In this episode, we discuss how does mortgage payments work, how payments are calculated, and the payment schedule. We also explore accelerated vs. non-accelerated payments and (if you can) should you pay down your mortgage faster?

 

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Transcription:

Hi everyone.

Welcome to another edition of Homebuyer's School.

Today I'm joined by Mujtaba Syed, Manager -  Mobile Mortgage Specialist with TD Canada Trust., and today the question we're gonna answer is [00:00:30]:

How do mortgage payments work?

Mujtaba Syed:             

Yeah, Karl. That's a great question.

So mortgages payments, the way they work is a mortgage payment consists of two different things:

  1. Which consists of a mortgage principle, which is the amount of money you're paying down on your mortgage, and 

  2. the interest portion, that's what we call P&I, principle plus interest. So the interest portion is just whatever the interest rate is based on what you've picked.

So your mortgage payment consists of your mortgage principle and your mortgage interest.

How mortgage payments are calculated

Karl Yeh:     Great. So how do you go about calculating your mortgage [00:01:00] payments?

Mujtaba Syed:             

Yeah, that's a great question.

So, your mortgage payments are determined by a lot of different factors:

Amortization just means the life of the loan.

The higher the amortization, the lower the payment is, but it also means that it will take you that much longer to pay off your mortgage. The lower the amortization, the higher the payment is.

So, a mortgage payment is determined by all of those factors to see what your payments are going to be.

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Do you know which is better to have, a   bi-weekly versus a monthly mortgage payments?

Mujtaba Syed:             

Yeah, absolutely.

So that just depends on what your personal preference is. It could depend on your pay structure.

If you're getting paid monthly then maybe having a mortgage payment come out monthly would make sense with your budgeting.

If you like bi-weekly, if you feel like it's a lot easier to budget bi-weekly, it's a lot more convenient for you, you can set up bi-weekly.

Banks also offer semi-monthly, which [00:02:00] is twice a month, sometimes even weekly.

So it really depends on what your comfort level is and what you've set yourself for your budgeting.

Difference between accelerated and
non-accelerated mortgage payments

Karl Yeh:                      

So [Moe 00:02:09], I've also heard about accelerated and non-accelerated, can you explain that a little bit more in terms of accelerated payments and non-accelerated payments?

Mujtaba Syed:             

So all banks actually give you some pre-payment options available to actually help pay off your mortgage sooner.

Any pre-payment options taken advantage of goes right towards your principle.

So, accelerated payments just means paying a little bit extra [00:02:30] compared to a normal payment, which actually can make a huge impact on paying it sooner and reducing amortization, which in turn also reduces your interest charge as well, which [inaudible 00:02:39] interest cost.

So the difference between accelerated and non-accelerated is non-accelerated is your normal payment, accelerated payment just means a little bit more. Whatever you've actually budget into paying above and beyond your normal payment will be accelerated payment.

If I can, should I pay down my mortgage faster?

Karl Yeh:                      

One question I've always wanted to know is if you had the capability, let's say you have five years left on your mortgage, [00:03:00] if you had the capability to pay off your entire mortgage all at once, right?

Is it better to continue paying it monthly or bi-weekly, or is it better just to pay it off all at the same time?

Mujtaba Syed:             

Yeah, so that's a great question as well, Karl.

So it's all based on personal preference, whatever your personal preference is, and whatever prestige you're in.

So, if you feel like hey, and you have some plans for those funds, you need those funds for a rainy day or you have some investment plans, it's great to kinda [00:03:30] hold on to that money.

But if you feel like hey, you wanna get your mortgage paid off sooner, it's a great way.

But I would definitely have a conversation with your bank to see, hey, do you have some pre-payment options available to actually pay off the mortgage without facing any penalties?

Most banks offer pre-payment privileges.

So you wanna make sure you have a conversation with them to see, does your paying off your mortgage fit within those pre-payment privileges, so there's not any penalties incurred to do so.

Karl Yeh:                      

So [Moe 00:03:56], why would there be a penalty in paying my mortgage faster?

Mujtaba Syed:             

[00:04:00] Well, it just depends, Karl. There might be no penalties, and there could be a penalty, it just depends on your pre-payment options that you set with yourself at the bank at the time that you signed the contract with them.

You are allowed to have a certain amount, so it's great to have a conversation with them to see am I paying off my mortgage within the limits of my prepayment options?

And if it is, great! There is no penalties. But if you've already used your pre-payment options available, there might be a slight bit of penalty.

Once again, it's a great conversation to sit down and have with your bank or lender to [00:04:30] see if there are any.

Karl Yeh:                      

So [Moe 00:04:33], do you have anything else to add in terms of mortgage payments?

Mujtaba Syed:             

Absolutely.

What I would really recommend to clients, if you set yourself a budget and you have some free, available, funds available, it's definitely to add a little bit extra to your mortgage to accelerate the payments.

A little bit extra can actually make a huge difference on the life of the loan.

Sometimes adding an extra 50 dollars bi-weekly, or 50 dollars monthly, could actually impact your mortgage being paid off a lot sooner.

Karl Yeh:                      

[00:05:00] Perfect. Well, thank you very much, [Moe 00:05:02].

Remember everyone that we have a lot of great videos on mortgage rates and mortgage pre-approvals that you can find in the description below.

Thank you very much for joining us, and we'll catch you next time.

 

Recommended watch:

So of our other videos that you may be interested in watching related to this topic are:

What's the difference between variable and fixed-rate mortgage?

New mortgage rules and stress test

How to compare mortgage rates between the banks in Canada?

How much can you get pre-approved for a mortgage?

 

Your turn:

Let us know if you have additional mortgage questions or home buying questions that we can answer by submitting them in the comments section below. 

Homebuyer's School publishes new content weekly so subscribe or check back regularly for the latest information, strategies and tips from homebuying experts. 

About Mujtaba Syed:

Mujtaba is an experienced mobile mortgage specialist with a demonstrated history of working in the banking industry. Skilled in Negotiation, Commercial Lending, Banking, Sales, and Credit Analysis. Strong product management professional.

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