When arranging a mortgage or a loan there are other costs that increase the annual interest rate. In order to intelligently compare different scenarios from lenders you should not necessarily accept the lender with the lowest annual interest rate because of other costs. The Total Cost of Borrowing(TCOB) is a method used to compare various mortgages and loans. The TCOB is a percentage number that considers all the costs and their impact on the actual annual interest rate you will be paying.

These other costs can be summarized as follows.

1… UP FRONT COSTS such as Brokerage fees, finders fees, points or mortgage insurance.
2… CONSTANT COSTS such as monthly mortgage insurance premiums.
3… VARIABLE COSTS as declining insurance premiums or different fixed interest rates for fixed terms.
4… BACK END COSTS such as closing out fees, discharge fees charged by the lender to register the mortgage in the land registry office when the loan is fully amortized.

All costs must be converted to UPFRONT COSTS before you calculate the TCOB. The upfront costs are assumed to be paid in cash or by cheque, and thus treated as a seperate issue from the actual loan. In Canada the total cost of borrowing is quoted as the new effective interest rate (EIR) and then referred to as the TCOB. In the USA the total cost of borrowing is quoted as the new annual interest rate (AIR) and then referred to as the APR. The simplest total cost of borrowing calculation is showing total upfront costs spread over the entire amortization period as shown below. All TCOB calculations are made to fit this format by utilizing present value future value calculations. Let us assume the total costs are $3000 for a $100,000 loan at 4.7503% using “monthly compounding” amortized for 30 years