When you take out a mortgage loan to finance purchasing a home in Canada, your regular mortgage payment will be made up of four main components. Understanding precisely what these elements are will assist you in budgeting for your housing costs and appreciating the total costs of Canadian home ownership.
- Principal, interest, property taxes, and home insurance premiums comprise the four portions of monthly Canadian mortgage payments. Understand these segments.
- The principal pays down the original mortgage loan amount over time while interest costs accrue based on the outstanding loan balance and mortgage rate.
- Property taxes and insurance premiums are often collected in escrow accounts as part of payments to save for eventual tax bills and insurance costs. Amounts vary by province and specific home factors.
The four portions that factor into your recurring monthly mortgage payment are:
The principal is the actual amount you initially borrowed for the home loan. Each monthly payment deducts a portion from the principal to steadily pay back this original loan amount over the full amortization period. In the early years, repayments mostly cover the interest costs but principal repayment amounts gradually increase over time.
Interest costs make up a significant part of your early mortgage payments since they are calculated as an annual percentage rate on the outstanding loan balance. Market mortgage rates and your negotiated terms determine this key interest cost factor. The interest owed decreases in later years as more principal is repaid.
Most mortgages feature escrow accounts where funds are set aside monthly to cover property taxes when annual bills come in. This avoids lump sum tax obligations. Tax amounts vary by local municipalities but expect at least 1-2% of a home’s assessed value annually.
Home Insurance Premiums
Lenders also require regular home insurance on mortgaged properties to protect from damage or loss. Premiums for this coverage are also commonly collected in monthly instalments as part of the mortgage via escrow holdings with similar tax savings as above. Shop rates annually.
Factoring in principal repayment, interest charges, property taxes, and home insurance premiums gives a complete picture of recurring costs from owning a home with a mortgage in Canada. While taxes and insurance can vary, you have more control over principal and interest by carefully shopping mortgage offers. Be an informed borrower, recognize the four mortgage payment segments, utilize a mortgage calculator, budget accordingly, and enjoy your new home.
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