Calculating Mortgage Amortization in Canada
When you take a look at whether or not a mortgage is going to be affordable, one important tool is a mortgage amortization schedule. This shows you not only your monthly payment but also how each payment breaks down as far as paying off your interest and your principal. In the United States, this is even more vital information, as mortgage interest in that country is a valid tax deduction. Even in Canada, though, this is valuable information, because you know exactly how much you are benefiting your home equity with each payment.
Mortgage Amortization Calculator
The easiest way to calculate your amortization schedule is to use an online tool like this one:
You’ll enter the type of mortgage you have, the type of rate, and the interest rate. Then you enter the term of the loan, the frequency of your payments, and the amortization period of the loan. The schedule that appears after that shows you each payment going forward.
If you have an open mortgage, an amortization calculator is useful in another way as well. An open mortgage allows for earlier repayment without any penalty. The interest rates on an open mortgage are higher than those on closed mortgages (which penalize early repayment), but the benefit is that you have the option of paying your loan off earlier than the term and getting rid of your debt altogether. If you pay more than the minimum monthly payment in an open mortgage, the excess payment goes to pay for principal, meaning that you can pay your loan off sooner than the term.
When you look at your amortization schedule, you’ll see the payments listed by month or number. Each month shows you the amount you paid (which should always be the same until the last one). Then that amount breaks down into principal and interest paid, as well as a running total for total interest as well as the balance remaining on the loan. As time goes by, you’ll see that the interest paid each month goes down, while the principal you are paying goes up.
If you have an open mortgage and are paying more than the minimum, though, that does not make your payment for the next month lower. If you plan to make two payments at once, for example, and then skip a payment, you have to have permission from you lender, even with an open loan. Without making that clarification, the bank will simply apply the extra portion of your payment to principal instead of giving you credit for two payments. You can end up hurting your credit if you don’t communicate your intentions to the bank.
So does paying more than the minimum make sense? It does, but not in a short-term way. If you look all the way down to the end of your amortization schedule, you’ll see that almost 100 percent of the last payment goes to principal, while just a tiny amount goes to interest. When you pay more than the minimum, imagine the excess money taking away that last payment (or part of it). When you’ve paid off the principal for that last payment, it simply disappears (as well as the interest expense for that payment). For the first few payments, you’re not getting rid of much in the way of interest expense. As time goes by, though, you will see the results snowball, as you find payments easier and easier to wipe off the end of the payment schedule (because there is less principal to pay for early), and more and more interest coming off the debt schedule.
Before you start making extra payments, though, make sure that you have saved up for your short term needs. If you have a cash emergency fund of $2000 sitting by for things like last-minute car repairs, and you have six months of expenses sitting in the bank in case you or your spouse loses a job, then you’re in a position to start knocking out extra principal. Before then, though, keep that extra money liquid so you can get to it.
If you have questions about how to run an amortization schedule, talk to one of our professionals at Amansad Financial. We have helped many clients with finding the very best loan for their needs.