When you first buy a home, there are several costs you must account for. From the initial down payment to legal fees, it can feel like a never-ending train of expenses. The good news is that once you get possession of your home, you don’t have to keep track of nearly as many costs. Other than general upkeep, the biggest cost you’ll have to budget for is your monthly mortgage payments. Unlike paying rent, mortgage payments are split up into a handful of different expenses. Having it all combined in one lump sum is convenient for both you and your lender.
The biggest chunk of your monthly payment is allotted to the principal amount. This is the outstanding balance of your mortgage. For example, if the overall cost of your mortgage is $250,000 and you’ve put $50,000 down, then the principal amount is now $200,000. As you keep paying the mortgage, the principal will decrease.
At its core, interest is simply the annual cost of borrowing money. Unlike the principal amount, however, it is not determined as a flat dollar amount, but rather a percentage. This rate is based on your total loan balance. At the beginning of your amortization, a larger portion will be allotted to the interest and a lesser one to the principal amount. Gradually, this ratio shifts and more of your payment goes toward the principal.
To put it in numbers: let’s say you start with a $200,000 loan balance at an interest rate of 2.5%. you’d be paying $5,000 the first year in interest. Fast forward several years and you only have $100,000 left on your mortgage. With the 2.5% interest rate, you’d only be paying $2,500 towards the interest that year.
Mortgage Default Insurance
In Canada, any mortgage purchased with less than 20% down requires mortgage loan insurance. While it may seem like a hindrance, this federal initiative offers two major benefits. The first is to protect the lender in the case that the borrower defaults. The second is to give Canadians who would otherwise not be able to afford a new home the chance to be approved. Rates for this insurance premium vary from 0.6% to 4.5%. Applicable vendors to purchase this insurance from are Canadian Mortgage and Housing Corporation, Sagen, and Canada Guaranty Mortgage Insurance Company.
In some cases, lenders may collect property taxes and lump those in with your monthly mortgage payments. This practice is most common with first-time homebuyers. When this occurs, the lender agrees to keep these funds in an escrow account until the taxes are due. They then will use this account to pay the property taxes on your behalf. The benefit of this is that you always know your taxes will be paid on time.
While there are cases where additional costs are also lumped into your monthly mortgage payments, this list covers the majority of the most common ones. Knowing exactly where your money is going is an important part of being a responsible homeowner and making informed financial decisions. If you are ever confused as to how your mortgage bill is broken up, reach out to your lender or one of our trusted mortgage specialists to help walk you through your unique agreement. Give us a call at (587) 609-5558 or send us a message here to get started.