How-to:
Understand the day-to-day impact of interest rate increases and decreases.
As borrowers for a mortgage. we understand that rate increases are “bad” and rate decreases are “good,” but we often fail to understand what it means to our monthly payments, and the amount of money that we borrow in total.
Today I share some quick calculations to show the impact of a 0.25% increase in mortgage rate. Subtract this amount for a rate decrease.
Cost of Borrowing
The cost of borrowing is directly related to the interest rate of the mortgage. A higher interest rate means that a borrower will pay more interest over the life of the loan.
Monthly Payments
Monthly mortgage payments are also affected by changes in interest rates. Higher rates result in higher monthly payments.
Example Calculation
Let’s assume a mortgage loan of CAD 400,000 with a 25-year amortization period. We’ll compare the impact of a 0.25% increase in interest rate.
- Initial Mortgage Rate: 4.00%
- New Mortgage Rate: 4.25%
Using the mortgage payment formula:
where:
- MM is the monthly payment
- PP is the principal loan amount
- rr is the monthly interest rate (annual rate / 12)
- nn is the number of payments (loan term in years * 12)
Initial Rate Calculation (4.00%)
New Rate Calculation (4.25%)
Let’s calculate these values.
- Initial Monthly Payment at 4.00%:
- New Monthly Payment at 4.25%:
Monthly Payment Difference
Total Interest Paid Over 25 Years
- Initial Rate (4.00%):
- New Rate (4.25%):
Total Interest Difference
Summary of Impact
- Increase in Monthly Payment: CAD 44
- Increase in Total Interest Paid Over 25 Years: CAD 13,200
A 0.25% increase in mortgage rate results in an additional CAD 44 per month in payments and an extra CAD 13,200 in total interest paid over the life of a CAD 400,000 mortgage with a 25-year amortization period.
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