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PROAPOD
®Real Estate Investment Softwarewww.proapod.com
How to Calculate US and Canadian Mortgages
 James R Kobzeff 
The major difference between how mortgages are calculated in the US and Canada rests solely onthe way compound interest is calculated.To understand the difference between US and Canadian mortgages, however, we should start at the beginning.
Compound Interest
The underlying assumption of compound interest is that interest is earned on interest. Therefore,with compound interest you apply the interest rate to the original principal as well as to allaccumulated interest. This is different from simple interest, where the interest rate is applied onlyto the original principal amount.Hence, the higher the compounding rate and the more frequent the compounding (known as thecompound period), the larger the resulting mortgage payment.For example, assume a loan amount of $100,000 at 7.00% interest rate amortized over 25 years.The monthly mortgage payment is $706.78 when compounded monthly and $700.42 whencompounded semi-annually. As you can see, the payment is higher when the compound period ismonthly rather than semi-annually because monthly compounding is clearly more frequent thansemi-annual compounding.Okay, let's consider the difference between US and Canadian mortgages.Mortgages in the United States are compounded monthly whereas mortgages in Canada arecompounded semi-annually. This means that monthly mortgage payments on identical loans arehigher in the United States than they are in Canada because the number of compounding periods per year is higher (as our example above reveals).
The Formula
To calculate the mortgage payment in either country correctly, you must first calculate the interestrate per payment. Here's the formula:
((1+interest rate/compound period)^(compound period/periods per year))-1
For example, assume an annual interest rate of 7.0%, and twelve periods per year. The calculation
©2009 James R Kobzeff. All rights reserved.
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