MCR3U Introduction to Mortgages

• A mortgage is a loan to purchase real estate.

• The length of time to repay the mortgage is called the amortization period. It is very common for
the amortization to be 25 years; however, some decide to pay the loan in less time, such as 15 and 20
years.
• The term of a mortgage is the length of time that the mortgage agreement, between the lender (bank)
and the borrower (homeowner), is in effect. It is very common for the mortgage term to be 5 years;
however, some agreements can be for as little as 6 months and as long as 25 years.
• Mortgage tables, such as the one below, shows monthly payments, for different rates, for each $1000
of a mortgage. Each payment includes the interest on the principal still owed and some of the
principal.

• For example, the monthly payment for a $200 000 mortgage at 5%/a c.s.a. with an amortization
period of 25 years is $5.82 * 200 = $1 164.

• By Canadian Law, the interest rate of mortgages is compounded semi-annually.

• The finance application on the TI 83+ graphing calculator can be used to determine monthly
mortgage payments. For example, to determine the monthly payment for a $200 000 mortgage at
5%/a c.s.a. with an amortization period of 25 years, we would enter the following values in the
finance application:
 N = 12 * 25
I% = 5
PV = 200 000
PMT = this is what we are looking to calculate
FV = 0
P/Y = 12
C/Y = 2
PMT: END BEGIN

The result of this calculation would be a payment of approximately $1163.21, which is very close to
the payment amount using the mortgage tables earlier.

• The bal( ) routine computes the balance for an amortization schedule using stored values for I %, PV
and PMT. For example, bal (30) returns the outstanding balance after the 30th payment.

• Further analysis show that the cost of the mortgage above would be approximately:

Total of all Payments = 300 x 1163.21 = $ 348 963

Mortgage Amount = $ 200 000
Cost of Mortgage (Total of all Payments – Mortgage Amount) = $ 148 963

• Mortgage payments are usually made monthly; but other lengths of time such as bi-weekly are
possible.

• Bi-weekly payments, payments made every two weeks, corresponds to 26 payments/year and not 24
payments/year. That is, paying every two weeks results in two more payments/year than paying
twice a month.

• Many people elect to make payments of ½ of what their monthly payment would be every two
weeks so that over the course of one year, they have paid the equivalent of 13 monthly payments.

• Lower interest rates, as little as 0.1%, a larger down payment along with more frequent payments,
can greatly reduce the amortization period of your mortgage and/or the size of your payments.