How does the Canadian mortgage payment calculation differ from the U.S. payment calculation?
The formula used to calculate mortgage payments in Canada and the U.S. is generally the same, but there are some differences in the specific calculations used.
In both Canada and the U.S., mortgage payments are calculated based on the principal amount borrowed, the interest rate, and the length of the mortgage term. However, in Canada, mortgage payments are typically calculated based on semi-annual compounding, while in the U.S., mortgage payments are usually calculated based on monthly compounding.
There are other key differences as well:
- Mortgage Terms: In Canada, mortgages are typically offered with a maximum term of 25 years, while in the U.S., terms can be as long as 30 years or even longer in some cases. This means Canadian mortgage borrowers must pay off their mortgages faster than their U.S. counterparts.
- Down Payment Requirements: In Canada, home buyers are required to make a minimum down payment of 5% of the purchase price, while in the U.S., down payment requirements can vary based on the type of loan and the lender. Some U.S. mortgage loans require as little as 3% down payment, while others may require 20% or more.
- Mortgage Market: The overall mortgage market in Canada is more heavily regulated than in the U.S. The Canadian government has implemented several measures to ensure that the mortgage market remains stable and that borrowers are not taking on too much debt. These measures include stress testing to ensure that borrowers can afford their mortgage payments and limits on the amount of debt that borrowers can take on relative to their income. In the U.S., there is generally less government regulation of the mortgage market.
Instructions for the Canadian loan calculator
Enter the four primary inputs:
- Loan Amount: This is the total principal amount of the loan.
- Number of Months: This is the length of the loan in months. You should enter the number of months that the loan will be repaid over. For example, if you have a 20-year mortgage, which is 240 months, you would enter 240.
- Annual Interest Rate: This is the annual interest rate on the loan. You should enter the interest rate as a percentage, not a decimal. For example, if the annual interest rate is 4.5%, you would enter 4.5.
- Payment Amount: This is the amount of each payment that you will make on the loan.
Note: You may enter 3 of the 4 values (Loan Amount, Number of Months, Annual Interest Rate, Payment Amount) and leave one value set to 0, and the calculator will calculate the unknown value based on the entered values.
The below secondary input must also be set.
- Payment Method: Select the payment method you will use to pay off the loan. If the first payment is due when the loan originates set this option to "Advance." Otherwise, we'll assume the first payment is due one month after the origination date (when the funds are available) and in that case, this must be set to "Arrears."
Canadian loan style assumes monthly payments and semiannual compounding.
This calculator will solve for any one of four possible unknowns: "Amount of Loan", "Total Scheduled Periods" (term), "Annual Interest Rate" or the "Periodic Payment".
Enter a '0' (zero) for one unknown value.
Normally you would set the "Payment Method" to "Arrears" for a loan. This means that the monies are lent on one day and the first payment isn't due until one period after the funds are received.
If the first payment is due on the day the funds are available, then set "Payment Method" to "Advance". This is typical for leases.