Expenses factored into mortgage costs

Home price: This is the total amount you’ll pay for a home. The home price directly impacts your mortgage amount, monthly payments, and overall costs. When choosing a home, consider other expenses like land transfer tax, property taxes, and home insurance to remain within your budget.

Down payment: When buying a home, you’ll need to pay a percentage of the total property price upfront, otherwise known as a down payment. A higher down payment reduces your mortgage amount and lowers monthly payments, while a smaller down payment increases these these costs.

Interest rate: An interest rate is the percentage of the mortgage amount that the lender will charge you for borrowing money, affecting your monthly payments. A lower rate reduces your total mortgage cost, while a higher rate increases it.

Amortization period: The loan term is the time it will take to pay your home loan. The maximum amortization period is 25 years if you put down less than 20% and 30 years if you put down more. A shorter term will have higher monthly payments but less interest paid overall. However, a longer term lowers mortgage payments and increases total interest costs.

Term: This is the length of time your mortgage contract is in effect, normally 1 to 5 years. When the term ends, you will need to renew, refinance, or pay off the remaining amount until the full amortization period is completed.

Property tax: Property taxes are a municipal tax based on the value of your property. It helps fund waste collection, road maintenance, parks, libraries, and other community services. Your lender may add the tax amount into your regular mortgage payments if they collect the property taxes for you.

MDI: Mortgage default insurance is typically required if you put down less than 20% when purchasing a home. This protects the lender in case you aren't able to pay your loan. MDI is typically added to your monthly payments, but it can also be paid upfront.

Home insurance: Lenders may require you to have buildings insurance to cover the structure of the property against damage from fire, floods, storms, or more disasters. This is requirement is typically a condition of the loan, but you can choose different levels of cover and cost based on your property.

Mortgage payment formula

This formula helps you figure out your monthly mortgage payments based only on the amortization period and interest. It does not include any additional costs such as land transfer tax, property taxes, or any fees that may increase your total monthly payment.

Manually calculate your monthly mortgage payments with this formula:

Here’s the breakdown:

M = Monthly payment:
This is what you’re solving for. To get started, gather your mortgage details. These factors will determine how much you'll pay each month.

P = Principal amount:
This is the mortgage balance, or the total amount that you still owe on your mortgage. Your mortgage balance directly impacts your monthly payment, interest costs, and home equity. You'll build more ownership in your property as the balance decreases.

r = Monthly interest rate:
The mortgage interest rate is an annual rate that will be paid monthly over the course of the year. To find the monthly interest rate, divide the annual percentage by the number of months in a year. For example, if your annual interest rate is 5%, this would look like 0.05/12 = 0.004167.

n = Number of payments:
This is the total number of payments you will make over the life of your mortgage. To find the total amount, multiply your amortization period in years by 12. For example, if your amortization period is 30 years, this would look like 30x12 = 360. This means that you will make a total of 360 payments throughout your amortization period.

Common mortgage types

Fixed-Rate Mortgage: Fixed-rate mortgages lock in your interest rate for the mortgage term, making it a great mortgage choice for predictable monthly payments. However, they can come with higher rates as opposed to variable mortgages.

Variable-Rate Mortgage: With a variable-rate mortgage, your interest rate may fluctuate with the prime lending rate, which is influenced by the the Bank of Canada's overnight rate. However, monthly payments will remain the same. This means that if rates increase, a larger portion of your payment will go toward interest. If the rate decreases, more of your payment goes to the principal.

High-Ratio Mortgage: High-ratio mortgages apply if your down-payment is less than 20%. You will be required to have mortgage default insurance, making your total mortgage costs go up. However, these mortgages often come with lower interest rates since the insurance reduces the lender’s risk.

Closed Mortgage: Closed mortgages offer lower interest rates compared to open mortgages, but they have restrictions on contract changes. This means that you won’t be able to renegotiate your interest rate or prepay your mortgage without facing a penalty. Closed mortgages are ideal for long-term homeowners who want lower rates.

Open Mortgage: An open mortgage allows you to break or make changes to your mortgage contract without penalties. This is ideal for buyers who want the flexibility to sell their home or make large lump-sum payments. However, they usually come with higher interest rates.

Conventional mortgage: A conventional mortgage requires a minimum down payment of 20%, eliminating the need for mortgage default insurance. Conventional mortgages can be a great mortgage choice for buyers who can afford a larger upfront payment. This also means lower monthly payments and interests costs.

Common closing costs when purchasing property

Land transfer tax (LTT): Land transfer tax is a municipal tax that you pay when finalizing a property purchase. The amount you pay is based on the home price and where you live. First-time homebuyers may receive a discount depending on the location of the property.

Legal fees: Legal fees refer to the costs paid to a real estate lawyer for handling the legal aspect of buying a property. These fees typically cover title transfers, mortgage registration, and contract review.

Appraisal fee: Before you purchase property, you may want to hire a professional appraiser to assess the condition and value of the home. While this is optional, it is recommended to help you ensure that the home price is accurate. Fees may vary depending of the type of survey conducted.

Home inspection fee: You may want to hire a building inspector to assess the condition of the home. They will be able to address any structural issues like mould, faulty wiring or water damage. While this is optional, it is recommended to help you avoid any unexpected repair costs.

Next steps after calculating your mortgage repayments

After you've estimated your mortgage payments, follow these steps to move forward with your property purchase.

Step 1: Find a lender. Compare mortgage options, interest rates, and fees to choose the lender that works best for you.

Step 2: Get pre-approved for a mortgage. Submit your basic financial details to get an estimate of how much you can afford.

Step 3: Start shopping for a home and put in an offer. Once you find a home, make an offer and negotiate the best deal with the seller.

Step 4: Once your offer is accepted, you can formally apply for a loan. Submit the necessary documents and complete the approval process.

Step 5: Complete the home-buying process by making your down payment and finalizing the purchase.