5.2.15 Case study: Financing a mortgage

From: Financial Consumer Agency of Canada

Kemal and Andrea have found a house and made an offer for $364,000—expensive, but they think it's within their budget. Their mortgage lender has agreed to lend them $339,000, the purchase price less their $25,000 down payment, at an interest rate of 4.5 percent. The lender has asked them to review the mortgage documents and choose the payment terms. "This is hard to sort out," Andrea says. "It's hard to choose among all the options," Kemal agrees. They use the Financial Consumer Agency of Canada's Mortgage Calculator to compare them.

Screenshot of the Mortgage Calculator Tool. Description in the text below.
 
  • With 12 monthly payments of $1,876.27 per year, the calculator shows Kemal and Andrea will have paid $223,881.99 in interest and $339,000 to repay the principal, for a total of $562,881.99 after 25 years.
  • If they chose a 20-year amortization period, their monthly payments would be $2,137.07—more than they have budgeted. Over the 20-year period, they will pay $173,897.63 in interest, plus the principal, for a total of $512,897.63. With a 20-year amortization period, their payments will be about $261 more per month, but $49,984.36 lower in total—and they'll be debt-free five years sooner. It sounds great, but it's more than the $2,000 they had budgeted. They're not sure they could afford it.
  • The calculator allows Kemal and Andrea to look at non-monthly payment schedules. For example, they receive their paycheques every two weeks. If they choose an "accelerated biweekly" plan—that is, paying half of the monthly payment every two weeks—their total cost after a 25-year amortization period will be $528,929.30, a saving of $33,952 over the standard 25-year term. That's because their payment is applied to the principal sooner, and they make an extra payment every year by paying on the biweekly schedule.

Kemal and Andrea compare a number of options. They feel that by watching their spending, they can afford the accelerated biweekly payment schedule. "Saving over $33,000 will make up for the difference in our monthly budget," Andrea tells Kemal. And when the five-year term ends, they may be able to afford higher payments to pay off the mortgage faster.

Amortization period

25- year term

20- year term

25-year term

Principal

$339,000

$339,000

$339,000

Payment

Monthly: $1,876.27 per month

Monthly: $2,137.07 per month

Accelerated biweekly: $938.14 every two weeks

Number of payments

300

240

564

Total interest paid

$223,881.99

$173,897.63

$189,929.30

Tip

Kemal and Andrea are planning to spend most of their money, and they may not have left enough for costs such as mortgage default insurance, taxes, legal costs and moving. These can add several thousand dollars to the cost of a new home. Be sure to check for any extra costs that apply when you consider a mortgage.

Lessons Andrea and Kemal learned:

  • Online calculators can help you understand and compare the effect of different financial options.
  • Shorter amortization periods and accelerated payments can significantly cut the interest cost of a mortgage.

Plan for your own mortgage with the Financial Consumer Agency of Canada's Mortgage Calculator and Mortgage Qualifier Tool. Enter the information for your current mortgage, or for a mortgage you expect to take out. Compare the possible options by choosing different selections from those given and decide which would best suit your needs.

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