Canadian Mortgage Interest Calculation Confusion
Canadian Mortgage Interest Calculation Confusion
A well known axiom, if you tell a story often enough it eventually becomes a fact in the publics mind. A May 30, 2009 Canadian newspaper article states that Canadians are “hazy on details” when it comes to mortgage terms. It is ironic that under the mortgage glossary heading, in that newspaper article, it is stated that interest payments are calculated usually every six months not in advance.
That statement is wrong!
Its also ironic that one of the financial people quoted in the article recommends that buyers “brush up on their mortgage IQ” yet allows that wrong explanation of interest calculation to be printed in the mortgage glossary that his company provided.
That wrong statement is legalese mumbo jumbo and only confuses the average Canadian! It’s the classic error of using the words “compounding” and “calculation” to mean the same thing.
If you have a monthly payment mortgage, an interest calculation is performed at the end of each month, on the outstanding balance, using a monthly interest factor! If you have a weekly payment mortgage an interest calculation is performed at the end of each week, on the outstanding balance, using a weekly interest factor. The portion of the payment in excess of the interest calculation is automatically applied towards paying down the balance (principal). Nobody in their right mind would willingly pay interest in advance (auto leases being the ridiculous exception). Knowledge is power!