Understanding Mortgage APR in Canada
If you’re thinking about taking out a mortgage to buy a house, or to take out equity from property you already own, then one number you’ve likely been following is the prevailing mortgage interest rate. A number you may not know about, if you’re new to real estate, is the annual percentage rate, or the APR. This is the number that tells you what borrowing actually costs you, and it includes the total interest as well as other fees, mandated insurance and closing costs. Lenders are required to disclose the loan’s APR before you sign for the mortgage, but this is information that some borrowers overlook in their excitement about getting the financing done. Comparing APRs among various lenders gives you a better handle on what the loan will cost you than simply comparing the interest rates.
Breaking down APR vs Interest Rate
The interest rate is the cost of borrowing the principal amount of the loan, and it is sometimes called the nominal rate. Some loans carry a fixed interest rate for the entire term of the loan, while others offer a variable rate. Each mortgage payment will cost you the same amount of money, but as time goes by, each payment will pay off more of the principal, with less going toward interest.
The interest rate for your loan will depend on a number of factors: the current base rate set by the Bank of Canada, your own personal finances (including your credit score, income history and current debt), as well as ongoing demand for loans and the supply of capital available for lending.
Individual lenders will set the APR for mortgages, because they set the fees that they charge in addition to the interest rate. If two different lenders offer the same interest rate but have different closing cost amounts, then their APRs will be different. Remember that lenders may not include all of their fees in the APR. Examples can include credit report fees, inspection fees and appraisal fees, so you will want to ask for the lender’s disclosure on fees to understand the total cost of the loan.
Interest rates are important to consider when choosing a lender, as even the difference of a half-point in rate can mean a significant difference over the life of the loan. Remember that if the interest rates are the same but one lender has a lower APR, that lender is charging you less in fees. The longer you plan to occupy the dwelling you are financing, the more important it will be to choose the loan with the lowest APR and the lowest fees up front. If you are planning to flip the property, though, you may get a better deal with a combination of a slightly higher rate with lower fees up front.
To calculate APR, you can use this formula:
[C / (T * A)} x 100
C = total cost of credit
T = term of the loan, in years
A = average principal balance outstanding at the end of each interest calculation period, before applying any amount against the principal.
In order to find out the A amount, you can use an amortization table of your loan. These are easy to generate online with one of the many engines you will find on the Internet.
What charges does an APR include?
All of the costs of borrowing that are included in APR calculations include:
- Administrative charges, including transaction and service charges connected to the loan;
- Service or disbursement charges connected to a solicitor or notary that the lender required the borrower to engage;
- Insurance charges (except for those excluded below);
- Broker charges, if the fees are rolled into the borrowed amount and paid by the company directly;
- Charges for surveying, inspection or appraisal services (except for those excluded below)
The costs of borrowing that are not included in APR include:
- Insurance charges wen the coverage is optional or if the borrower is the beneficiary and the insured amount is the value of a security asset for the mortgage;
- Overdraft charges;
- Prepayment penalty charges;
- Charges for registering documents or gaining information concerning security interests from a public registry;
- Any charges for a solicitor or notary besides the ones mentioned above;
- Insurance charges for coverage against title defects, if the borrower bought the insurance directly;
- Appraisal, surveying or inspection charges provided directly to the borrower;
- Insurance charges against default on a mortgage or hypothec with high ratio;
- Maintenance fees for a tax account, whether required or optional
- Charges to discharge a security interest;
- Default charges
It is important to note that private mortgages will come with a higher APR than mortgages from a traditional lender, primarily because of the higher interest rate. Borrowers should take care to determine whether the short-term solutions that private mortgages present are worth the higher APR, taking into consideration the possible consequences of failing to secure financing.
As always, Amansad Financial stands ready to help you find the private lending source that best fits your needs when bank financing is not available. Contact Us today.