As humans, we tend to focus on the big purchase price of a home. This big amount of money needed to reach our goal of homeownership leaves us demoralized as it is usually larger than our annual income by multiple factors. But in reality, we get paid in smaller sums on a weekly, biweekly or semi-monthly basis, so why not break down our mortgage amount into smaller payments similar to our payroll schedule? This makes it easier to digest these big numerical values into smaller payments based on a repayment schedule.

To get an accurate mortgage payment for your prospective mortgage balance, you must also understand how interest rates are determined specific to term length and amortization periods. You will need to have all these details handy before you learn how to use a mortgage calculator.

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Key Highlights

• Find the rate before using the mortgage calculator for a lower monthly payment.
• Lowering mortgage payments only sometimes save you money.
• Lower monthly payments may come with more restrictions.

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Why Use a Mortgage Payment Calculator?

A mortgage payment calculator is a digital financial tool that can make a difficult task easy. Gone are the days of using an amortization table or financial calculator to estimate your mortgage payment. In today’s world, most lenders and banks offer some form of mortgage calculator on their website that does the hard work for you. All you need to know is your mortgage amount, interest rate, amortization period and term length. You provide these details, and the mortgage calculator will spit your expected mortgage payment.  

Some mortgage calculators will offer more features, such as separating your payment into principal and interest components over your mortgage term or amortization. Some advanced calculators will also show you how to lower your monthly payment by making small changes to your payment frequency or taking advantage of your prepayment privileges – such as annual payment increases or lump sum prepayments.

Understanding the Inputs of a Mortgage Calculator

Asking Price –  This price at which the seller offers their property for sale. This should be distinct from the property value, which is lesser of the agreed-upon sale price or the appraised value. The property value is what your mortgage lender will use to calculate all other factors in your mortgage commitment.

Down Payment – The down payment is the difference between the purchase price and the mortgage amount. This sum of money includes the deposit you make to the seller when you accept the offer to purchase the property and the money you give towards your purchase price to your solicitor on the day of your mortgage closing.

Amortization Period – The amortization period is the length of time it would take you to pay off a mortgage in full, based on regular payments at a certain interest rate. Assuming the interest rates are the same, a longer amortization period means you will pay more interest-carrying costs over the life of the mortgage versus a shorter amortization period.

Payment Frequency – The payment frequency on a mortgage is the schedule at which your regular interest and principal payments are made to your mortgage. The payment frequency can be made on a weekly (52 times a year), biweekly (26 times a year), semi-monthly (24 times a year) or monthly (12 times a year) basis. Some lenders will give an option for accelerated payments on the weekly and biweekly frequencies; these are halved semi-monthly or semi-monthly payments, respectively.

Mortgage Rate – The mortgage rate is the interest rate charged over the mortgage term. This is the agreed-upon discounted fixed or variable interest rate. A fixed mortgage rate will stay the same throughout the mortgage term.  A variable mortgage rate will fluctuate with the lender’s prime rate over the course of the mortgage term.

Mortgage Rate Term – The mortgage rate term, also known as mortgage term, is the period for which the mortgage interest rate – or the discount from prime on a variable or adjustable rate – is guaranteed. In the case of a variable mortgage rate term, the payment will stay fixed as the prime rate fluctuates, but the interest component of the mortgage payment will fluctuate. For an adjustable mortgage rate term, the total mortgage payment will fluctuate by the same factor as the interest rate as the interest component alone.

Understanding the Summary of a Mortgage Calculator

Mortgage Payment – The mortgage payment output calculated over a mortgage term is specific to the mortgage balance with a specific interest rate over a defined amortization length.

Total Mortgage Amount – The total mortgage amount comprises the mortgage balance plus any applicable broker/legal/appraisal fees or mortgage default insurance premium added to the mortgage being taken out.

Principal Paid – The principal paid is the total of all the principal components of all the mortgage payments made over a specific period – this is usually displayed for the mortgage term and the amortization period.

Interest Paid – The interest paid is the total of all the interest components of all the mortgage payments made over a specific period – this is usually displayed for the mortgage term and the amortization period.

How to Use a Mortgage Calculator to Lower Your Payment

There are many ways to use a mortgage calculator to lower your payment. But before you do lower your payment – you have to ask yourself if you are trying to increase your cash flow or save money. Those two goals are only sometimes aligned; read on to understand further.

Increase your Down Payment to Get a Lower Monthly Payment

You can have a lower monthly payment by inputting a lower mortgage balance – this can be archived by increasing your downpayment. If nothing else is changed, this will give you a lower payment and save you money in the form of interest-carrying costs over the life of your mortgage.

Increase your Amortization Period to Lower Monthly Payment

Another way to lower monthly payments is to input a longer amortization period into your mortgage calculator. If everything else is the same, this will lower your payment, but it will not save you money. By increasing your amortization period, you will take longer to pay off your mortgage – this means carrying a principal for a longer period and paying interest-carrying costs on it while you take additional time to pay it off.

Change Your Payment Frequency to Lower Your Payment

Though technically not lower, you could change to a reduced frequency which will lower your payment. You could change your monthly payment (for example, $1000 per month) to a semi-monthly payment (for example, $500 semi-monthly on the 1 and 15th of each month). However, this doesn’t reduce the total monthly payments, which will remain at $1000 and thus create no savings for you. This action should be taken to make the payments more manageable, such as aligning with your payroll frequency, to simplify your budgeting practices.

Conversely, suppose you have a biweekly payroll frequency and wish to simplify your budget. In that case, you could reduce your monthly payment to an accelerated bi-weekly payment – that is, a semi-monthly payment applied to your mortgage on a biweekly frequency. This option would lower your payment and save you years of interest-carrying costs on your total mortgage amount.

Lower Monthly Payment Without Lowering Your Expectations

The lowest payment or interest rate is only sometimes the best option for everyone. Depending on your short and long-term goals for owning your home, it may be wiser to choose the mortgage solution that works best for you. The best solution for you may not have the lowest payment or mortgage rate. As the interest rate is priced based on the risk that you and the property represent to the lender, it may be best to review the restrictions attached to that mortgage rate. 

The lower payment or interest rate is one of the most important aspects of getting a mortgage. Rather it is to save yourself the most interest-carrying costs over the life of your mortgage. Sometimes the lower payment or interest rate is offered through the “no frills” or “restricted” or “limited” mortgage that a lender offers, which beyond not having a high rate, doesn’t have any prepayment privileges or other features such as portability or assumability.

Lower Interest Rate on the Mortgage You Want

If you pay out the loan before maturity, there may be restrictions tied to a hefty penalty. Restrictions can come in the form of features, benefits, and bigger penalties than the usual 3 months interest or interest rate differential. You may have to give up features such as prepayments or porting privileges when opting for the lower payment or interest rate solution. Without the ability to port, penalties on interest rates with lower payment solutions can be large, such as a percentage of the mortgage balance at the time of payout.

Mortgage rates in Canada vary depending on different factors such as your income, your credit score, the property used as collateral, your income capacity to service your debts, your capital in the form of savings/investments and down payment, and most importantly, conditions. Conditions such as the purpose of the loan and the loan-to-value (LTV) ratio  – these two conditions will have the most impact on the rate. The mortgage rate is priced based on the risks associated with that mortgage, property and borrower.

Final Thoughts

A mortgage calculator can output a value, but you need the correct input. One of the most important inputs in using a mortgage payment calculator to calculate your mortgage payment is to use the correct interest rate. Many factors determine mortgage rates. 

Before you use a mortgage payment calculator to calculate the mortgage payment, we advise you to speak to a mortgage expert who can provide you with the correct mortgage rate. A mortgage expert can also show you how to save even more with a full-feature mortgage by making small changes and taking advantage of your mortgage prepayment privileges. Contact nesto today and speak to one of our commission-free mortgage experts to get the most suitable mortgage solution with the best mortgage rate for your unique borrowing needs. 

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