August 6th, 2008
September 13th, 1997.Canadian Mortgages are usually drafted to comply with the (Federal) Interest Act. That Act provides that if a mortgage is made payable by blended payments of principal and interest then the mortgage must contain a "statement showing the amount of principal money and the rate of interest chargeable thereon, calculated yearly or half-yearly, not in advance." Few people know what that means. Most of us think that mortgage interest of 12% each year is the same as one per-cent (1%) each month. That is OK in the USA! But not in Canada, pity! For interest calculated half-yearly it actually means 0.0097587942 (used in the formulas) or in percent 0.97587942% each month. For interest calculated yearly it means 0.0094887929 each month. Although the difference seems small, if you are a bank with many mortgages the small differences mean a lot of money!
Before computers, BC, mortgage lenders used monthly interest rates calculated by using logarithms and printed in books. In the absence of computers, powers and roots are easily handled by multiplying and dividing logarithms, and that was the way the Interest Tables were made for the books.
Now some Mortgage lenders use daily interest calculations, and with equal monthly payments, the payments may be more or less than required because the payment required varies with the number of days between payments. So what you pay may or may not be adequate to keep on the old type of schedule. Using a spreadsheet makes more sense to keep track of your mortgage calculations,if interest is charged daily. That way you can enter what a Mortgage lender does, in fact, charge each month, what the lender should have charged, and what you paid.
This is a link to download an Excel Spreadsheet to produce a Mortgage Schedule,
This program produces a mortgage repayment schedule for a Canadian mortgage using half-yearly or yearly interest, with equal payments paid on the same day each month:
Interest is calculated monthly and added monthly, NOT calculated daily and added monthly. Payments are monthly, and paid on the same day of each month. A spreadsheet is the easiest way to show the effect of additional payments.
Mortgage Details
The same calculations may be seen in : Mortgage calculation using an Excel Spreadsheet