**Effective Interest Rates:**

The Total Cost of Borrowing, TCOB, is nothing more than a fair method for showing borrowers the impact of the total fees charged by a Lender or Mortgage Broker on the quoted annual interest rate. The total fees are typically up front moneys paid by the borrower to the Lender or Mortgage Broker or both.

First of all, nominal rates are always associated with an effective rate because of the compounding. Thus a 12% nominal rate with semi-annual compounding has an effective rate of 12.36%. An 11.7106% nominal rate with monthly compounding has an effective rate of 12.36%. Isn’t that a coincidence! You can now see the advantage of quoting an effective interest rate, EIR, because there is no need to be concerned with the method of compounding. A lender quoting you an EIR of 12.36% on a loan of $1000 for one year actually earns $123.60 in interest on the initial $1000 loan for a total return of $1,123.60 at the end of the year.

The intent of the TCOB legislation in Canada, is to ensure that the lender, or mortgage broker, will quote you the effective interest rate, EIR, of the new rate after all the costs (fees and points ect) are factored into the loan.

In the USA the TCOB is often called the APR, Annual Percentage Rate. It matters not what you call it as long as you understand the mathematics.