If your mortgage term is ending soon, then you will have to renew your mortgage. And knowing how to calculate mortgage renewal payments can help you save money. In this guide, you will learn about mortgage renewal, steps to calculate it, and how you can manage it.
So, without any more delay, let’s jump right in!
What Is a Mortgage Renewal?
A mortgage renewal will happen when your original mortgage term ends. Most mortgage terms in Canada last for 1 to 5 years. But your total mortgage can last 25 or even 30 years. When the term ends, you will need to renew your mortgage to keep paying for your home.
Step-by-Step Guide to Calculating Your Renewal Payment
There are two ways you can calculate the payment. You can either calculate it manually or you can use tools. Here are the guides for both ways:
Manual Calculation
Here’s a thorough guide on how you can use the formula to calculate manually:
Step 1: Gather Your Information
You need some key numbers:
- Your current mortgage balance (the money you still owe).
- The new interest rate offered by your lender.
- The length of your new term or amortization period (how long you plan to pay off your mortgage).
- Your payment frequency (monthly, bi-weekly, or weekly).
Step 2: Understand the Mortgage Payment Formula
There is a math formula to calculate your monthly mortgage payment. It looks like this:
M=P×r(1+r)n/(1+r)n-1
Where:
- M is your monthly payment
- P is your mortgage balance
- r is your monthly interest rate (annual rate ÷ 12)
- n is the total number of payments (months in your term)
Step 3: Calculate Your Payment
To make it simple, let’s try with an example. Suppose you owe $300,000, and your new interest rate is 5% per year. Your amortization period is 25 years. Here is how you calculate:
- Convert 5% to monthly: 5% ÷ 12 = 0.004167
- Calculate number of payments: 25 years × 12 months = 300 payments
- Put numbers into the formula and solve (or use a calculator to avoid mistakes).
You will find your monthly payment is about $1,750.
Step 4: Check Other Payment Options
If you pay biweekly, your payments might be a little less monthly. But in this way, you will have to pay it more often; it can help you pay off your mortgage faster.
Using Tools to Calculate
Many websites offer free online mortgage calculators for you. Here’s how you can calculate using them:
Step 1: Enter Your Mortgage Amount
In the calculator, you’ll see boxes for “Mortgage Amount.” It is the amount of money you still owe on your mortgage. For example, if you still owe $700,000, type that number into the box.
Step 2: Add Your Amortization (Years)
Now find the box that says “Amortization (Years).” This is the total number of years you want to pay off your mortgage. Most people in Canada choose 25 years. You can enter 25 in the box if that works for you.
Step 3: Compare Interest Rates
Right under the top two boxes, you’ll see two sections:
- Current Variable Rate
- Current Prime Rate
Each box has a mortgage rate and a monthly payment result. So, let’s say that your current variable rate is 4.3%. You will find your monthly payment to be $3,796.86.
But if the prime rate is 4.95%, your payment will go up to $4,051.33.
Key Factors Affecting Renewal Payments
Your mortgage renewal rate can be different for many reasons. Here are some factors that can affect these payments:
Interest Rates
Interest rates affect how much you pay. For example, if your current rate is 3% and it changes to 5%, your payments will go up.
Amortization Period
The amortization period is how long you have to pay off your mortgage. A longer period will mean smaller monthly payments with more interest over time. A shorter period means higher payments but less interest.
Outstanding Balance
If you paid down a lot of your mortgage, your balance is lower, so your renewal payment will be lower. If you borrowed more or didn’t pay much, then the balance will stay high.
Payment Frequency
If you choose weekly or biweekly payments, then you can save money in the long run. In this way, you can make more payments each year.
Note: Experts in the industry, like Asim Ali, offer free calculators. You can enter your numbers and get your payment.
Conclusion
Knowing how to calculate mortgage renewal payments will make things easier for you. You will know the right rates, and there will be lower chances of you getting wrong information.
You can also take help from a reliable professional who has a deep understanding of the market. If you have any other questions, you can reach out to us!