When you take out a mortgage to purchase or refinance your home, you’re borrowing money to pay for it. You make regular payments to repay the mortgage over time, called “repayment.” Your lender uses the repayment schedule to calculate how much interest you owe. The mortgage repayment amount is determined by how much you borrow, the length of the amortization period, and whether you choose a fixed or variable rate mortgage.
Mortgage Payment Components
In Canada, three components make up the total amount you pay monthly for a home loan. Principal refers to the money borrowed; interest is what makes it possible to repay the loan over time, and property tax.
Every time you make a payment for your mortgage, you’re paying down both the principal and the accrued interest.
Principal
The principal is the amount you initially borrowed to purchase a property or the amount you refinanced. When you get a new mortgage, a large part of the payment goes towards interest. As you keep paying down the mortgage, the amount towards the principal portion will gradually increase.
Interest
The interest paid on a mortgage represents the cost of borrowing money. You must pay interest every month to cover the difference between the amount you initially borrowed and the amount you actually owe. Interest rates vary depending on the type of mortgage you choose.
And interest is calculated based on the length of the life of the loan and how much you borrowed.
Property Tax
Property taxes are charged annually by municipalities to help fund public schools, roads, libraries, police departments, fire stations, and other essential city services. Property taxes are calculated based on the house’s value and where you live. Property taxes in BC range from 0.25% to 0.52%.
You can pay property tax by yourself or let the lender collect the property tax with your regular payments. The property tax portion the lender collects will go to the escrow account, and the lender will pay the property tax in July on your behalf. If you are eligible for the grant the province is offering, like the homeowner grant in BC, you will need to apply for the grant.
When Mortgage Payments Start
The first mortgage payment is usually scheduled on the first day of the month after, an entire month after the “closing date.” However, unlike rent, due on the First of the Month every month, mortgage payments are paid “in arrears.”
Say a Closing Occurs On January 25. The closing costs will include the accumulated interest until the end of January. The first full mortgage payment for February is due March 1.
Fixed-rate mortgage payments VS Variable rate mortgage payments
Fixed-rate mortgage payments
Fixed-rate mortgages are easier to understand than variable-rate mortgages because fixed-rate mortgage payments don’t change over the term. The benefit of a fixed-rate mortgage is easy budgeting because you know exactly how much you’ll pay every month over the mortgage contract term.
Variable rate mortgage payments
With variable-rate mortgages, interest rates fluctuate as the Bank of Canada’s prime rate fluctuates. This makes it difficult to predict how much you’ll owe each month.
Variable-rate mortgages vs Adjustable-rate mortgages
When it comes to variable rate mortgages, understanding the differences between an adjustable-rate mortgage (ARM) and a true variable rate mortgage (VRM) is important because they each have different implications for your financial situation. The difference is that your payment amount changes with an ARM loan based on the current Bank of Canada Prime Rate, and with VRM, your payment amount does not change. Instead, the potion of the payment towards your principal will reduce or increase by the change in the rate.
With both ARM and VRM, you can select to lock in your loan at a fixed rate at any time without penalty. This way, moving forward, your rate cannot increase, and the payment will be fixed.
Variable Rate
Unlike the adjustable rate loan, one of the main benefits of a variable rate loan is that you can more readily continue to budget your monthly expenditures because of its fixed mortgage payment.
Trigger rate
Suppose your interest rate rises to such that your monthly payment doesn’t cover the interest. In that case, your lender may raise your payments, extend the term of your loan or require you to repay the principal. It’s called a “trigger rate.” A trigger rate is set by your lender and is usually specified in the contract.
Adjustable Rate
With an adjustable-rate mortgage, like a variable rate, your mortgage rate is floating; however, unlike a variable-rate mortgage, your mortgage payment will change as the prime rate changes.
Mortgage Payment Frequency
Most Canadian mortgage lenders offer multiple payment frequency options for borrowers. Let’s take a look at them:
- Monthly (12 payments per year)
- Semi-Monthly (24 payments per year)
- Bi-Weekly (26 payments per year)
- Weekly (52 payments per year)
- Accelerated Bi-Weekly (26 payments per year)
- Accelerated Weekly (52 payments per year)
Monthly Mortgage Payments
With this type of loan, your monthly mortgage payments are taken out of your bank accounts every month on the same day – 12 months per year. This is the most common payment option.
Semi-Monthly Mortgage Payments
The semi-monthly mortgage payment is just splitting the monthly payment amount into two smaller sums instead of paying one large sum each month,
To calculate your semi-monthly payments, multiply your monthlies by 12 and divide by 24. The total amount you pay during a calendar year will be equivalent to what you’d pay with a monthly payment plan.
Bi-Weekly Mortgage Payments
A bi-weekly repayment option is calculated by first calculating your yearly repayment amount by multiplying your monthly payments by 12 and then dividing it by 26 payments (or halves of 52 weeks in a calendar year). Your total repayment for the entire calendar year will be the same as the monthly repayment option.
Weekly Mortgage Payments
Like the bi-weekly option, weekly payments are determined by calculating your yearly payment amount by multiplying your monthlies by 12, then dividing that by 52 weeks. The total sum paid within a calendar year is equal to the monthly installment option.
Accelerated Bi-Weekly Mortgage Payments
With the accelerated Bi-weekly payment option, you will divide your monthly payment by two and pay this amount every two weeks, 26 pay periods in a year. This gives you a slightly higher payment than the plain bi-weekly payment option, but in a year, you will make a payment equivalent to 13 monthly payments. You will pay down your mortgage quicker than the regular bi-weekly payment option, and you will save a significant amount of interest in the long run.
Accelerated Weekly Mortgage Payments
Accelerated Weekly mortgage payments are calculated similarly to bi-weekly accelerated payments. Instead of dividing the monthly payment by 2, you divide it by 4. And you will pay this amount 52 weeks in a year. Again, the payment amount is slightly higher than weekly payments, but the advantage is having more of your money directed toward the principal amount owed. And you will pay down your mortgage quickly. The total payment amount in a year is the same as the accelerated Bi-weekly payment option.
Example of the different mortgage payment frequencies
$400,000 mortgage at 5% with a 25-year amortization.
| Payment | total payment in 5y term | Total Principle | Total interest | Amortization | |
| Monthly | $2,326 | $139,585 | $45,970 | $93,615 | 25 years |
| Bi-weekly | $1,073 | $139,431 | $45,970 | $93,461 | 25 years |
| Weekly | $536 | $139,364 | $45,970 | $93,394 | 25 years |
| Accelerated Bi-weekly | $1,163 | $151,217 | $59,327 | $91,890 | 21 years 6 months |
| Accelerated Weekly | $582 | $151,217 | $59,408 | $91,809 | 21 years 6 months |
What will happen when you want to make prepayments?
Prepayments are extra amounts you can add to your monthly payment before the due date without incurring a prepayment penalty. The extra amount will be applied directly to the principal. Usually, lenders allow you to prepay 15% to 20% of your mortgage amount every mortgage anniversary year. It is called prepayment privilege. You cannot carry forward the unused amount of prepayment privilege to the following year.
Your prepayment privileges allow you to:
- increase your scheduled payments by a certain percentage or double up (some lenders)
- make lump-sum payments up to a certain percentage of the mortgage every year.
There are also the conditions of your prepayment privilege, and they vary from lender to lender.
Before you get a mortgage, check the conditions to find out:
- how much prepayment the lender allows in total per year
- when and how many times the lender allows you to make lump-sum prepayments
- how much payment increase the lender allows, and when you can make changes
- if there’s a minimum or maximum amount, you’re allowed to prepay.
When you decide to make a lump sum payment, you should remember that putting lump sum payments towards your mortgage doesn’t change your regular payment amount. It will shorten the life of the mortgage and save on the interest you would pay, but it won’t reduce your standard payment amount and increase your cash in your pocket every month.
Conclusion
For most people who have mortgages, mortgage payments are the biggest monthly expense. That’s why it’s important to review your mortgage payments.
If your goal is to pay off the mortgage faster, you should look into accelerated biweekly mortgage payments. These payments will allow you to pay off your home more quickly, saving you interest money. Or, if you have extra funds available, you can use the prepayment privilege.
Using these payment options and prepayment privileges, you could be mortgage-free sooner.
You can calculate how much interest you would save and how fast you can pay off the mortgage with extra payments with our mortgage calculator here.
And, of course, if you have any questions about the mortgage, please get in touch with us. We are happy to answer your questions!
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