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# Mortgage Calculator

Your home is an investment. If you have a mortgage, then you probably want to repay your mortgage as soon as possible, minimizing your interest cost, without sacrificing your quality of life. Use this mortgage calculator to evaluate and develop a strategy by testing the effects of your repayment options. Full use of double up payments, lump sum payments, unique payments, custom payments, skips, and percentage increases are available.

### The Ultimate Mortgage Calculator

My quest to build the Ultimate Mortgage Calculator began years ago.  I had just purchased my first house, and felt like I was being crushed by a home loan that was the size of a mountain.  I was looking for some escape avenue; I needed to find a way to believe that this mortgage would eventually be paid off.  I had a forty year amortization, and really did not want to be paying this mortgage until I retired.

My mortgage expert had told me during the application process that I would be able to make extra repayments in several ways: I could double up my mortgage payments, I could make a lump sum payment every year, I could increase my payments every year by up to ten percent, and if I needed a little breathing room, I could skip a payment every year.  My next question was obvious: which way was the best to pay off this mortgage?

Unfortunately, there was no way at the time to really analyze which repayment method would work the best for me.  I was told by my financial advisors the effects on my repayment period and interest sum if I made a lump sum payment, but I could not be sure that this was the most effective way, considering my goals, to repay my mortgage.

So I built my own Mortgage Calculator.  I included every repayment option available, and then tried out each one to see the effects.  The results were astounding.

I was already stretched beyond belief to make each mortgage payment, and tried to picture how I would get the money to make a lump sum payment every year and could not do it.  Besides, what is the point of saving up money to make a payment a year from now while I will be paying the interest on the balance until then.  Doubling up payments created the same problem, every dollar extra spent on my mortgage was another dollar out of my tiny wedge of disposable income.  Skipping a payment every year helped free up some money for fun, but really put me backwards one the amortization.  However, the percentage increases was a different story.

I figured that my income would be increasing at least 2% the following year, and that I could afford to increase my mortgage payment by the same amount, and could probably do so every year.  I did not feel that this was really a sacrifice; it was really just maintaining my current mortgage payment to income ratio.  The results were amazing: by increasing my mortgage payment by 2% every year I could pay off my 40 year mortgage in only 25 years!  I was going to save \$116,320 in interest!

This was the beginning, where I realized the power that came from understanding how finance really worked, how I could make my life so much easier.  I figured that it could do the same for everybody else as well.  And this has led me to build this site, beginning with the world’s best Mortgage Calculator.

##### How a Mortgage Calculator Works

A Mortgage Calculator serves a purpose.  When we use a Mortgage Calculator we are looking for information that will be used to make a decision.  A Mortgage Calculator is supposed to provide the information you are looking for, by calculating possible scenarios for you.  The actual function of a Mortgage Calculator is to use inputs provided by the user to calculate the desired answers.

Most Mortgage Calculators are simple, and use a few inputs to calculate a simple result.  Examples of these can be Mortgage Payment Calculators, which will calculate the mortgage payment based on the original mortgage balance, the mortgage interest rate, the mortgage amortization, and the mortgage payment frequency.  The problem with simple Mortgage Calculators is that they provide very limited information.

Simple Mortgage Calculators typically use a mathematical formula to calculate the result.  Thus, the Mortgage Calculator is used to speed up the calculation of a formula which could be calculated with a handheld calculator.  The problem is that you may have more questions that need to be answered.  Typically the decision making process does not end with a simple result.  Often people wish to test different scenarios, or build on the answers provided by the simple Mortgage Calculator.

When you use a Mortgage Calculator, you are looking to make a decision, and you need information.  Although it is handy to have the calculated answer to a formulaic question, it is not sufficient to make a good decision.  A mortgage is by its nature a means to an end.  We wish to purchase real estate, and we need help paying for it.  It makes sense to borrow to purchase the real estate asset, and then to pay back the mortgage over time.  Of course there is a cost to this.  A mortgage can actually get quite complex in the way that it behaves, and people need to have the tools to analyze this complex financial vehicle.

A complex Mortgage Calculator will allow users to go more in depth with their financial analysis.  Although a complex Mortgage Calculator will use formulas, they are often used to create a table of calculations.  Each row of a table would represent a payment, and the number of rows in the table would correspond to the number of payments.  This allows each row to contain a series of formulas, whose variables will adjust to the different inputs supplied by the user.  This allows the user to isolate important information, and provides multiple results for different data points based on the same inputs supplied by the user.

A complex Mortgage Calculator will let users isolate the mortgage payment, the mortgage interest paid, the number of payments made, as well as any changes built into the Mortgage Calculator, such as skipping a mortgage payment or making an additional lump sum mortgage payment.

Complex Mortgage Calculators like this will provide information on two basic levels, each one critical to the users decision making.  This first is sensitivity analysis.  By testing different scenarios to understand how factors can change the results, the user can understand the sensitivity of the results to changes in these factors.  Sensitivity analysis is used to test changes in factors that are beyond the users control, such as a change in interest rates.

The second level of analysis is strategy testing.  The user will have options available to them that will change the results of their mortgage calculations.  The most obvious one is that you will be able to make additional payments on the mortgage.  Doing so will reduce the balance at that time, and therefore reduce the interest cost and amortization over the life of your mortgage.  Making extra payments is a strategy that you may wish to employ in order to achieve a goal, such as reducing your interest cost or paying off your mortgage sooner.  But you may wish to understand the benefits to making an extra payment today compared to doing so in two years.  A complex Mortgage Calculator should allow you to test different strategies.

Since complex Mortgage Calculators use a table to calculate, they are able to manipulate individual rows of calculations, allowing you the flexibility to test more detailed strategies, and better understand the effects of those strategies.

The output of a Mortgage Calculator is really the most important part.  If a Mortgage Calculator performs all of the calculations properly but doesn’t produce a useful output for the user, then a lot of the value is lost.  The designer of the Mortgage Calculator needs to understand exactly what information the user is looking for.  This comes from understanding what decisions the user is trying to make.  The Best Mortgage Calculators will have easy to read, intuitive, and highly useful reports.  Each result in the report should be isolated so as to be tested with strategic testing by the user.

##### Why the Ultimate Mortgage Calculator is the Best Mortgage Calculator

The Ultimate Mortgage Calculator is the Best Mortgage Calculator for several reasons.  Having worked as a mortgage lender for several years, I am familiar with the detailed level of information people are looking for in their decision making.  I understand that decisions regarding your mortgage are highly important, and that making decisions regarding your mortgage without enough information can cause a high level of stress.  I am a real estate investor and have been interested in testing different mortgage repayment strategies for years.

Because of this, I have designed a Mortgage Calculator that will allow you to test almost all of the mortgage repayment options available.  I know that not everybody is looking for the same thing when they are analyzing their mortgage, and that a mortgage calculator needs to provide sufficient information to answer all questions.  My goal was to allow you to test every strategy you can come up with, so as to find the best one that fits your goals and your lifestyle.

The Ultimate Mortgage Calculator is designed to be easy to use.  I wanted to make sure that you can find the answers to all of your questions, and that this would not happen if you had difficulty operating our Mortgage Calculator.  For this reason I wanted to make it as easy to use as possible.  Simply fill in the blanks, and the calculator will do all the work for you.

The Mortgage Calculator table is displayed for you to view.  In order to gain a good understanding of how your mortgage works, you need to understand how it operates over time.  The only way to show this is with a fully displayed table.  Our table not only provides the complete mortgage amortization, but it provides the mortgage payment over time, the mortgage interest, the mortgage balance, and every mortgage repayment made.  You can even insert a onetime unique mortgage payment into the mortgage amortization table.

The Ultimate Mortgage Calculator report is detailed, and will provide you with the answers you are looking for.  The report details not only the mortgage interest cost, mortgage amortization, and the mortgage term, but it will also compare the mortgage repayment strategy you tested against the same mortgage with no additional repayments.  This allows you to maximize the benefits you are looking for, whether it is improving your cash flow or reducing your interest costs.

The Ultimate Mortgage Calculator will let you test your mortgage repayment strategies against your existing mortgage.  Most Mortgage Calculators are designed to test new mortgages only.  They do not give you the freedom to include you current mortgage, often you have to conduct trial and error testing to guess at your current amortization.  Our Mortgage Calculator will allow you to simply input your current mortgage balance, interest rate and current payment, and the Mortgage Calculator will automatically recalculate the remaining mortgage amortization for you, changing the mortgage payment table and report.

Compare the Ultimate Mortgage Calculator against any other Mortgage Calculator, and you will quickly find out how limited they are.  Enjoy using our Mortgage Calculator to test your mortgage repayment strategies, and please share it with your friends.

##### Canadian Mortgage Calculator vs USA Mortgage Calculator

Although there are several major differences between mortgages in Canada and the US, when it comes to Mortgage Calculators, there is little that really needs to be changed.  Mortgage interest in the USA is tax deductible.  This is a huge difference between how people make decision regarding their mortgages in the US and Canada.  Due to the tax deductibility, many USA residents are more willing to carry a larger mortgage balance than Canadian Residents.

But this important tax factor does not affect the Mortgage Calculations.  The critical factor that needs to be included in any Canada Mortgage Calculator is the calculation of fixed rate mortgage interest.  In Canada, fixed rate mortgage interest cannot be compounded more than twice per year by law.  This means that Canadian Mortgage Calculators need to adjust for this.  Using a Mortgage Calculator to make important financial decisions that does not adjust for this uniquely Canadian factor will result in mistaken information.  Our Mortgage Calculator is a Canada Mortgage Calculator and a USA Mortgage Calculator.  When you select which country your mortgage is in, the Mortgage Calculator will make the adjustment as required.

##### Mortgage Payment Calculator

The most popular Mortgage Calculator is the Mortgage Payment Calculator.  Determining the mortgage payment is a simple matter, and often done by simple formula.  Due to the simplicity of this type of Mortgage Calculator, many websites will include this for their users.  Of course it does not really provide useful information in regards to strategy testing, sensitivity analysis, or decision making, but it does answer the simple question.

A mortgage payment can be a complex financial concept to grasp fully.  To begin with, each mortgage payment will be the same, yet each on will be different.  What does this mean?  Each mortgage payment will be composed of two parts, interest and principal.  When a mortgage payment is made, the interest that has accumulated on the balance since the last payment will be paid first, with the remainder of the payment applied to the outstanding balance.  This slightly reduced balance will be charged interest again for the next payment, but since the balance will be slightly less than before, the interest portion of the payment will also be slightly less.  As each payment goes on, the portion of the payment that is used to pay the interest reduces.  Thus each payment is slightly different than the last one.

Another important concept to grasp is the relation between your mortgage payment and your income.  Mortgages typically have constant payments that do not change over the life of the mortgage, except between terms.  However, your income will most likely rise over the life of your mortgage.  Remember that mortgages can be amortized over thirty years sometimes, as long as a career.  Not only will you likely earn promotions and seniority, but you will also receive cost of living raises to compensate for inflation.  The nice thing about a mortgage payment, is that is does not rise due to inflation.

Typically, a mortgage payment will be a large burden to homeowners when they first finance their home.  They will soon find that their income grows and the mortgage payment becomes quite manageable.  Later they will find that the mortgage payment is almost too small, and begin to increase their payments voluntarily.  Although most mortgages are amortized over 25 years, the average time to repay is about thirteen years.

If you receive income from your home, such as rent from a basement apartment, you will find this even more powerful.  Not only will the income you receive from work increase, but the rent will grow with inflation as well.  It is not uncommon to have the rent from a basement apartment entirely pay the mortgage payment after several years.

##### Mortgage Interest Calculator

Probably the largest concern for mortgage borrowers is how much interest they will pay to their lender over the life of their mortgage.  Depending on the amortization and the mortgage interest rate, the amount of interest paid to a mortgage lender can be more than double the original principal.  For this reason, a Mortgage Interest Calculator is often of most interest to a borrower.

What’s important in a Mortgage Interest Calculator is to understand how the mortgage payment, the mortgage interest rate, and the mortgage amortization work to determine the total amount of interest paid over the life of a mortgage.  This is why it is so important for a Mortgage Interest Calculator to provide a table for the user.  By detailing where the most interest is charged, borrowers can develop strategies to repay their mortgage in a way that will reduce their interest cost, while still fitting in with their lifestyle.

##### Mortgage Amortization Calculator

Amortization is a critical factor in determining the total interest cost of a mortgage.  Our Mortgage Amortization Calculator provides a full mortgage amortization table, detailing each year’s worth of payments, interest, principal, and additional payments.

Amortization as a concept is often misunderstood by borrowers.  Amortization is offered as an option at the beginning of a mortgage by lenders.  Borrowers choose how long they wish to take to repay the mortgage, and the payment is calculated to fit the equation.

However, once the mortgage is activated, the amortization becomes the result of all other factors, much like the total interest cost.  Mortgage amortization is a moving number, and will be altered with every skipped payment and additional payment made against the mortgage.  Any change in interest rate or adjustment to the payment amount will alter the mortgage amortization.  For this reason, it is important not to get hung up on the length of the amortization, as though it is some barrier to be overcome.  Rather, it is an indicator of the existing factors and the strategy of the borrower.

##### Mortgage Balance Calculator

The balance of a mortgage at any time in the future is easy enough to determine algebraically if the original terms of the mortgage are adhered to.  Often borrowers will exercise their options for mortgage repayment, such as making lump sum payments and skipping mortgage payments.  When adjustments like these are made, determining the mortgage balance can only be calculated using a table.

Our Mortgage Balance Calculator uses a table to calculate the future mortgage balance each year, dependant on the original mortgage factors as well as any repayment strategies applied along the way.

Using an accurate and detailed Mortgage Balance Calculator is important when forecasting equity in your home.  Many home buyers cannot purchase their dream home as their first home, and often they purchase a “starter home”.  The purpose of the starter home is to help build equity which they can use to purchase their dream home later.  There are two forces that will affect the value of the equity in the house, market growth and mortgage repayment.  If your goal is to build equity in your home, you need to have a detailed understanding of how your mortgage repayments will build equity, so as to accurately plan and make good financial decisions.

##### Mortgage Repayment Calculator

When you put together all of the above Mortgage Calculators, you end up with a Mortgage Repayment Calculator.  Typically the goal of using a Mortgage Calculator is to determine the best strategy to help you live with your mortgage.  In order to do this, you need to be able to calculate and test every mortgage strategy that you have available.

Our Mortgage Repayment Calculator allows you to play with all of the options available.  Our mortgage research revealed that most mortgage repayment options fall into several types.

Many lenders allow borrowers to double up their mortgage payments.  This means that borrowers can increase their regular payment, often by up to double.  Our Mortgage Calculator allows you to add any amount to each payment as a double up, even if the amount is not actually equal to the original payment.

Borrowers are also allowed to make annual lump sum payments every year.  The amount allowed may differ depending on the lender, but we allow you to make a regular annual lump sum payment.

Sometimes borrowers will not be able to repeat their lump sum payments, since it may be the result of a onetime cash flow such as an estate or cash prize.  We allow you to make a onetime lump sum payment by inputting the amount in the actual mortgage table in the year you wish to make the payment.  This is useful for forecasting lump sum payments that are the result of property sales, for those who have multiple properties.

An important and often overlooked repayment option is the ability to increase payments by some percentage amount every year.  Our Mortgage Calculator allows you this option.  Simply input the percentage amount that you wish to increase your payment every year.  You will be able to see the actual payment amount each year in the payment table.

Skipping a mortgage payment can be a useful option for those who need a little breathing room.  Many people have one time large annual costs, such as property insurance, that can make life difficult.  Skipping a mortgage payment can help to smooth the cash flow and make life a little easier for home owners.  Of course this will increase the mortgage balance as the interest is added back to the principal, effectively lengthening the amortization.

It is important that your Mortgage Calculator be able to include any or all of these repayment options, so that you can test and compare to find a strategy that best fits your lifestyle.

##### Mortgage Repayment Strategies

Repaying your mortgage will take a long time, regardless of which repayment strategy you go with.  You must remember that you will be dealing with your mortgage for a long time, and any repayment strategy you design needs to fit your life.  It may be tempting to make sacrifices in order to make additional mortgage payments, but this can lead to a lot of hardship.  Remember, you will not receive the benefits of your actions for a long time.  You may save \$5000 in thirty years by paying an additional \$1500 today, but that still means you have to make do with \$1500 less today.

That being said, there are several options to look at when designing your mortgage repayment strategy.  The most effective way to design a repayment strategy that will not increase your stress level will be to make it fit your cash flow.  Take a look at how your family receives income.  By matching the mortgage payment to your cash flow, incremental changes are easy to make and do not require much guess work.

If you receive your pay every two weeks, then making your mortgage payment every two weeks will make budgeting easy.  If you receive your pay monthly, then choosing weekly payments will cause you a lot of hardship for very little financial benefit.  This is the easiest part of designing your repayment strategy, simply choose a payment frequency that matches your income.

Now take a look at one time income sources.  If you contribute to a tax sheltered retirement savings plan, then you may expect to receive a cash tax refund every year.  You may have some type of bonus or commission structure that provides you with quarterly, monthly, or annual lump sum payments.  These can be important sources to make additional repayments.

Do not forget to look at your onetime expenses as well.  You may have an annual tax bill, or large annual insurance fee.  Maybe you like to take your family on vacation twice a year, or go home for Christmas.  When designing a mortgage repayment strategy, it is important to make your priorities clear, as you do not want to skip the things that make you happy in order to save interest several years from now.

Another important factor is to determine how long you wish to stay in this house for.  If you intend to live in your current home for 5 years, and then move to a bigger one, then you should make your mortgage plans around your desired equity level at that time.  You do not need a 30 plan if you will be leaving in 5 years.

There are some important principals that need to be understood when designing your repayment strategy.  The first is that additional payments will be more effective at the beginning of your mortgage than at the end.  A \$1000 additional payment at the beginning of a 30 year mortgage will be much more effective than the same \$1000 payment in the last 5 years.  This is because of the amount of time it takes to pay this amount from the regular payments.  The mortgage payment is mostly interest at the beginning of the mortgage, and mostly principal at the end.

That being said, inflation will affect the value of that \$1000 payment.  Making a \$1000 payment 25 years from now will be much easier than it is today, as inflation increases income levels.  In fact, if you adjust your regular payment for inflation, increasing it by 2% or so every year, you will effectively reduce the amortization and total interest cost, without feeling any additional burden.  The ratio between your mortgage payment and your income will remain constant, while the absolute value of your payments increases every year.

##### Mortgage Calculator Instructions

Input values in the white boxes.
When available, make selection from drop down list.
You may alter the regular payment provided by inputting a Custom Payment in the box provided.
You may enter a unique payment in the Mortgage Table tab.
Go to the Report tab to view the results of the calculator.

##### Descriptions

Mortgage Details

Country
Choose which country the mortgage will be borrowed in.

Mortgage Balance
Input the amount of the initial or current mortgage balance.

Interest Rate Type
Choose which type of interest rate your mortgage will have.

Interest Rate
Input the annual interest rate stated by the lender.

Amortization
Input the number of years that it will take to repay the mortgage.

Payments per Year
Choose how frequent you will make mortgage payments

Term
Input the number of years the current mortgage term will be.

Payment
This is the regular payment amount you will be pay according to the variables chosen.

Custom Payment
You may alter the regular payment by entering the desired payment amount in this box.  Return to the default payment by entering a ZERO value.

Repayment Options

Skip a Payments per Year
Input the number of skipped payments every year.

Double Up Payment Amount
Input the amount of each double up payment to be made.  Enter “MAX” to automatically fully double up these payments.

Double Ups per Year
Input the number of double up payments made every year.

Lump Sum Payment Amount
Input the amount of the regular annual lump sum payment that will be made every year.

Annual Percentage Increase
Input the percentage amount that the regular payment will be increased by every year.

Unique Payment
Input the amount of each unique payment to be made only in the chosen year.

##### Assumptions

Fixed Rate in Canada are compounded semi-annually, all other rates types in USA and Canada are compounded at the payment frequency.

All calculations are made on the assumption that the year is divided equally by the amount of payments made per year.

Double up payment(s) are applied to the first payment(s) of the year.

Skips are applied on the final payment(s) of the year.

Lump Sum payments and Unique payments are applied to the final balance of a year.

All results are calculated based on the input variables provided by the user, and assumptions that are believed to be reasonable. UltimateCalculators.com does not make any express or implied warranties with respect to the information or results in connection to this, or any other calculator. UltimateCalculators.com will not be held liable for any losses or damages resulting from any errors or omissions in any information or results, or any action or decision made by users in reliance on any information or results. Please consult Instructions & Assumptions for further details.

### Mortgages 101

Author  Graham Lancaster
Editor    Sonia Germain

Every property is an investment, so treat it like one. You should consider the following when thinking of a mortgage:

A home is always more than just a place to live, it is also an integral part of our financial lives.

Mortgage payments will consume a large part of our disposable income, the equity in our home may well be the largest single investment we own, and market shifts can create or erode a large part of our net worth.

The interest cost we will pay over the life of our mortgage is staggering, often much more than the value of the home when we bought it.

When something is this important in our lives, it deserves attention and planning to ensure we benefit as much as possible, and avoid making any big mistakes.

So this begs the question: what do we do about it?  The answer is easy: we plan.

By making plans that go as long as the mortgage itself, we will do a much better job of succeeding financially.

We need to find ways to repay the mortgage that won’t sacrifice our quality of life.  We need to find borrowing solutions that allow us to buy the house we really want.  We need to find ways to pay off our mortgage in a timely fashion.

This is where our mortgage calculator comes in!

This is what they do, it is how they make their money. You have to live with this mortgage for the next 35 years of your life, so what you should focus on is to develop a plan to repay this mortgage in a way that fits with your life.  Using our mortgage calculator will help you do this.

Your mortgage lender has probably allowed you to make repayments to your mortgage in a few ways, by increasing your payments, making anniversary payments, doubling up your payments, you are probably even allowed to skip a payment under certain circumstances.

Our mortgage calculator will allow you to try out all of these methods to find the best way that works for you.

### Pay Off Your 35 Year Mortgage in 23 Years!!

Author  Graham Lancaster
Editor    Sonia Germain

Paying back a mortgage is a long and painful process.  We know that if we make extra payments against our mortgage it will save us lots of money in interest.

But the problem is: Who has extra money lying around that they can use to make the extra payments?  If we had the extra money than we would just be making larger payments against the mortgage in the first place, and that would save us lots of interest cost and shorten the time it takes to repay.

One of the options that many lenders give homeowners is the ability to increase their payments every year.  You can use our mortgage calculator (www.ultimatecalculators.com) to test how effective this strategy can be to repay your mortgage faster and you may discover that it is very effective.

The nice thing about increasing your payments every year is that it fits with your lifestyle.  Odds are that you do not have a lump sum of cash lying around to apply every year against your mortgage, but it is likely that your income will rise a little bit every year, even if it’s just for inflation.

If you have a \$300,000 mortgage borrowed for 35 years, and are paying 5% interest, increasing your payments every year by 2% would be a really effective way to repay your mortgage.  You would save \$105,472 in interest over the life of your mortgage, and you would pay it off in about 23 years, instead of 35 years.  And you wouldn’t have to sacrifice your annual vacation, your savings plan, or your lifestyle.

Try increasing your payment every year by different amounts with our mortgage calculator to see how much money you will save on your mortgage….and then contact your lender to make the appropriate adjustments!

### So What’s In a Payment?

Author  Graham Lancaster
Editor    Sonia Germain

Have you ever looked at what is in your mortgage payments?  Every mortgage payment you make will contain at least two components, interest and principal.

A mortgage is no different than any other loan, except that it is massive.  It is simply a loan that you take to purchase your house.  The only problem is that you will have to repay this mortgage, and it will take a long, long time.

Early on, your mortgage payment will be mostly interest, and just a little bit of principal.  When you make your mortgage payment, you pay the bank interest on the outstanding mortgage balance (massive) before you make any repayment on the actual balance itself.
Let’s use an example:

If you borrow \$300,000 to purchase a home, and the bank charges you 5% interest, with a 35 year amortization, your monthly mortgage payment will be \$1514.07. After a year, you will have paid \$18,168.84 to the bank in mortgage payments, but you will have only paid \$3242.48 in principal on your mortgage!  Ouch!

This is why it takes so long to repay a mortgage; you always pay the interest cost first, before paying down the balance.  The balance is paid down slightly with each payment, and this reduces the interest cost slightly for the next mortgage payment.  It takes a long time before your regular mortgage payments really start paying down the balance.

On the same 35 year mortgage noted above, it takes 25 years before you actually hit the half way mark.  The second half is paid down in the last ten years.

So how do we change this?  By making extra payments early.  The earlier you make additional payments on your mortgage, the bigger the savings.  If we take our mortgage above, and check how effective a \$1,000 extra payment is at different times, we get the picture.  If we pay an extra \$1,000 right at the beginning, we save \$4,700 in interest cost over the life of the mortgage.  If we paid that \$1,000 at the end of the fifth year, we save \$ 3449 in interest.  At the end of the 15th year we save only \$1707.

You can use our mortgage comparison calculator to test different mortgages and repayment options to come up with a way to save you money that works best for you. You only need to enter the numbers, no calculations are required!

### Fixed Rate or Variable Rate?

Author  Graham Lancaster
Editor    Sonia Germain

Quite often, borrowers are focused on the question posed by their lender: Would you like a variable rate or a fixed rate mortgage?  Why does a lender offer two types of rate to his clients?  The reason is that they offer the borrower the ability to assume some risk, for a discount.

Lenders need to get the money that they lend you from somewhere, and they get it from the market.  They borrow money and then turn around and lend it to you.

Think of them as a store that will buy a large amount of items, getting a significant bulk discount, and then offer the same items to you individually for a higher price.  This works well, because nobody wants to buy 300 bicycles: the odds are that they only want one.  A bank works the same way. They borrow very large amounts of money through the market, and then lend it to individuals at a higher price (rate).

What the lender is doing by offering you a choice of fixed or variable, it is offering you the two prices that the bank can get money at.  A fixed rate won’t move over the period agreed upon, often five years.  If the bank lends money to you at a fixed rate for five year, and then the rate goes up, they miss out on the potential profits that would have happened.  In order to justify this, the bank will add a slight premium on the rate that they get the money at to compensate them for this missed opportunity.

A variable rate is much simpler. The bank will get the higher rate of interest if rates rise over the time that the money is borrowed, so they will not need to be compensated for this.  This means that in the long run, variable rates will always be a little bit cheaper than fixed rates, simply because the borrower accepts the risk that rates might go up, instead of the bank.

Use our mortgage comparison calculator to compare the total interest cost you would pay with the current rates provided by your mortgage lender.

### All Mortgage Rates are Variable in the Long Run

Author  Graham Lancaster
Editor    Sonia Germain

In last week’s note, we explained the difference between a fixed and variable mortgage rate. Making a decision between fixed and variable rates can be a difficult one for borrowers, as they try to look into their crystal balls and guess what will happen to rates in the long run.  There are two main reasons why someone will choose a fixed rate over a variable one.

Some borrowers will guess that rates will rise higher than the current fixed rate offered by their lender.  They figure that if rates rise in this time, then they will save money because their rate will stay fixed at the low rate they can get today.  This can work very well if you are correct.
Other borrowers will take a fixed rate because they do not like the thought of their rates changing over the next five year term.  It makes them uncomfortable, and they like the peace of mind that a fixed rate will give them.

Unfortunately, most mortgages are not paid back in a single interest rate term.  Often it takes at least three five year terms to pay back a mortgage.  This means that even a fixed rate will be subject to change during the life of the mortgage.  When the term ends, the fixed rate offered will reflect the interest rate market at the time, and these rates could be higher or lower than they are at the beginning of the mortgage.

This means that even a fixed rate cannot protect a borrower from rate change, and the impact it can have on your comfort level.  It is important for homeowners to understand that in the long run, all rates are variable.  Fixed rate terms may change only between terms, but they still are subject to change.  It may be better to develop an understanding of this early in your mortgage, so as to avoid any feelings of discomfort later.

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