Why a Mortgage Calculator Canada don’t work like others | 2018
Many people in Canada don’t understand why there is differences between a mortgage calculator Canada and other mortgage calculators. There are a few specific reasons for that.
Firstly the interest on a Canadian mortgage is compounded semi annually or twice a year. This means that they will add the outstanding interest to the mortgage balance twice a year causing the outstanding amount to be bigger. From then on this interest will also cause more interest to be calculated.
On other mortgages the interest is compounded every month. This will mean that if you get behind on your payments outside of Canada, the total interest will build up a little faster.
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The second difference in a Canadian mortgage is that the interest rate at which you will get the mortgage will depend on the contract term that you choose. If you choose to take a longer term your interest rate will generally be lower.
This is different from mortgages outside of Canada where the interest rate won’t be determined by the contract term you sign. The interest rate will normally also change as interest rates goes up and down.
You can go for a longer mortgage contract term and get a lower interest rate. This will normally be the wise thing to do. You have to remember that your interest rate will stay the same, even when the interest rates goes below the level you are paying on your contracted mortgage rate.
The third thing is that Canadians often use a bi-weekly mortgage acceleration plan. This isn’t unique to Canada but is often used there.
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What this means is that you will make a payment every two weeks. It is an accelerated payment plan as well which means that you will be paying more per month. This of course will help to get the mortgage paid back quicker which is a good thing.
The bi-weekly mortgage acceleration plan means that you will be paying halve of your normal monthly payment every second week. And because there are normally a few days more than four weeks in a month, you will be paying extra.
If for example you have a monthly payment of $1 000 and pay 12 times in a year, you would have paid $12 000 by the end of the year. Now if you have a bi-weekly accelerated payment plan your payments would be $500.
There is 52 weeks in a year, so paying every second week will mean you end up making 26 payments. Making 26 payments of $500 each will have you paying $13 000 by the end of the year. This is almost equivalent to making and extra full payment when paying $1 000 on a monthly basis.
Although it looks equivalent to one extra payment at the end of the year it isn’t. You will be paying extra every month and this will reduce the interest which is compounded bi-annually. So it is better to make bi-weekly payments than it is to make one extra payment at the end of each year.
There is formulas available for converting a mortgage calculator to a mortgage calculator Canada, but it is much simpler to use one that is already adapted for Canada.