There’s no shortage of numbers to think about when considering a mortgage for a home purchase, but the monthly payment is by far the most impactful, and for good reason. It’s the figure that acts as the foundation for the budget for most homeowners.
Yet monthly payments can be a bit mysterious for those new to mortgages. Common questions that arise are: How are the payments calculated? What variables determine the final number? What can you do to lower — or at least to avoid increasing! — the payment you end up with?
Let’s find answers to these questions and more with the help of a resident Meridian expert Mike Healy, MBA, Regional Manager, Mobile Mortgage Sales for his insights on the topic.
Meridian Mortgage expert Mike Healy, MBA, Regional Manager, Mobile Mortgage Sales
Understanding the limits of online calculators
Once you have even a rough idea of the cost of a home that suits you, you can map out an initial estimate of your monthly mortgage payments using the abundance of online calculator tools. These calculators factor in variables such as home price, down payment, amortization period, and interest rate and are helpful for exploring how payments may be affected when different numbers are used. Take a look at Meridian's mortgage payment calculator.
However, not all calculators are created alike! You can end up with significantly different estimated payments across calculators — that’s why it’s best to use them only to arrive at a general idea of monthly payments. Your lending representative can give you a much more accurate idea once you start the mortgage process.
Estimates aside, what formula is used to calculate the actual payments?
A mortgage payment is the amount you will pay weekly, bi-weekly, or monthly (most people choose monthly) to repay both the principal (the amount you borrowed) and interest you’ll pay on the principal.
In Canada, the mortgage payments formula takes into account the principal, the interest rate (either variable or fixed), the amortization period (the number of years before the mortgage is paid off), and payment frequency (weekly, bi-weekly, monthly, etc.).
“Opting for bi-weekly mortgage payments and aligning them with your direct deposit schedule is a smart strategy,” offers Mike Healy, “to reduce the total interest paid over the life of the mortgage and to shorten the overall amortization period.”
Let’s walk through an example calculation to compare monthly versus bi-weekly payments:
If you’re seeking approval for a $500,000 mortgage and expect to pay 5% interest monthly over a 25-year amortization period:
- Monthly 5% interest rate divided by 12 months = 0.004167
- Amortization of 25 years × 12 months = 300 months
- Your monthly payment would be approximately $2,532
However, if you choose to pay $1,452 bi-weekly (exactly half of the $2,532 monthly payment), you’ll make two more payments per year, but:
- You’ll pay off the mortgage 3.5 years earlier
- You’ll save approximately $60,000 in interest
How can mortgage payments go up or down?
Of course, any calculation of a mortgage payment in Canada will only apply to the initial term of the mortgage prior to renewal (usually after three to five years) in a fixed-rate mortgage. And if you choose a variable-rate mortgage, your payments may very well rise or fall during the mortgage term should Canada’s prime rate rise or fall. Here’s how your monthly payments can fluctuate:
Variable-rate mortgages — If you have a variable-rate mortgage, rising or falling interest rates will directly affect your monthly payments.
Fixed-rate mortgages — The predictability of fixed interest means you aren’t affected by rate changes, but your mortgage is still subject to renewal. When you renew after your current term is up (usually in three-to-five years), you may face higher or lower rates, impacting your future payments.
Trigger rates and negative amortization — If your variable-rate mortgage payment only covers interest, your financial institution may add the unpaid interest to your principal, leading to negative amortization and increased debt.
Work with a lender that offers payment flexibility, like Meridian
At Meridian, you can pay your mortgage using a payment schedule that works best for you. Choose from weekly, bi-weekly, monthly, bi-monthly, or accelerated weekly or bi-weekly payment plans.
To explore your options with an expert, make an appointment with a Meridian Mortgage specialist.
Learn more about mortgage basics
Help for first-time home buyers
