How is my mortgage payment determined?

April 24, 2017

Your mortgage payment is a function of five factors:

  • Mortgage amount
  • Interest rate
  • Amortization
  • Compounding frequency
  • Payment frequency

This calculator from the Financial Consumer Agency of Canada will compute your mortgage payment to the penny, assuming semi-annual compounding.

Here are some important tips to keep in mind:

About Compounding

  • Most mortgages in Canada are compounded semi-annually except certain floating-rate mortgages which are sometimes compounded monthly.
  • Compounding has a small effect on your payment. On a $300,000 25-year mortgage at 3% for example, semi-annual compounding saves you just $2.89 per month.

About Floating Rate Mortgages

  • If you’re in an adjustable rate mortgage, your payment will increase or decrease in response to changes in prime rate.
  • If you want a floating rate mortgage where the payment doesn’t change, choose a “variable rate mortgage” instead of an “adjustable rate mortgage.”
  • Even variable rate payments can change if prime rate goes up so much that you’re not even covering the interest due. Rates typically have to rise over 2%-points for this to happen, which is rare.

About Prepayments

  • If you have made prepayments then:
    • At renewal, your lender will generally set your payment based on your originally scheduled amortization as if you had made no prepayments at all.
    • If you are switching lenders, your new lender may use the amortization that appears on your discharge statement. That amortization may be less than your originally scheduled amortization if you have made prepayments, causing your payments to be higher than you expect.
    • You can usually ask your current lender to “re-amortize” your mortgage back to your scheduled amortization if you need to lower your payment.