Chris Grimes Mortgage and Lending Ottawa, ON 8(779) 338-3832 Contact Profile
Quite often we are asked to calculate payments or we are asked why the payment is different from the one I calculated online? Or have you ever wondered why the cost of borrowing rate is higher than the rate you thought you were locked-in at. Well normally there is a simple answer. In Canada, interest charged on mortgages is determined using a semi-annual interest calculation. Click here for an Excel based Canadian mortgage calculator, or to learn how to do these calculations by hand see below. I will write a two part article this week on how to calculate your mortgage payment by hand. Here is how to calculate the effective interest rate:-
The first thing to realize is that there are three types of interest calculations:- simple interest, compound interest and effective interest.
Simple Interest – The cost of borrowing money, calculated by applying the interest rate to the original principal amount only. In contrast to compound interest,
interest is not charged on interest.
(Simple Interest = P x i x n)
Compound Interest – Interest charged not only on the principal sum but also on interest amounts charged, but not paid, in preceding periods that accumulate as new principal.
Effective Interest – The actual rate that the borrower must pay on a loan after the effects of compounding are considered. It is also known as the true rate. It differs from the nominal interest rate.
(Efffective Interst = (1+(i/m) m - 1 )
Mortgage interest is always compounded semi-annually in Canada. In the US this is not the case, mortgage interest is compounded annually.
To Calculate Mortgage Payments and Interest Rates you will need the following information:
1. Nominal or Annual Interest Rate (I)
2. Compounding Periods per Year
3. Effective Annual Rate
Add interest from the first period to the second period
Total Interest = $5,250+$5,433.75
Total Interest = $10,683.75
5. Calculate the Effective Interest Rate