May/110
Understanding the Difference Between US and Canadian Mortgages
The major difference between how mortgages are calculated in the US and Canada rests solely on the 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 all accumulated interest. This is different from simple interest, where the interest rate is applied only to the original principal amount.
Hence, the higher the compounding rate and the more frequent the compounding (known as the compound 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 when compounded semi-annually. As you can see, the payment is higher when the compound period is monthly rather than semi-annually because monthly compounding is clearly more frequent than semi-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 are compounded semi-annually. This means that monthly mortgage payments on identical loans are higher 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 interest rate 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 for the interest rate per payment for semi-annual compounding (as in Canada) is:
((1+0.07/2)^(2/12))-1 = 0.575%
The calculation for the interest rate per payment for monthly compounding (as in the USA) is:
((1+0.07/12)^(12/12))-1 = 0.583%
Are you able to see the difference? With semi-annual compounding, the compound period is 2 (twice annually) whereas with monthly compounding the compound period is 12 (twelve times annually).
Okay, now let’s calculate each country’s loan payment where:
rate = interest rate per month (0.575% or 0.583%)
loan amount = $100,000
nper = total number of payments for the loan (300, or 25×12)
Formula: -PMT(rate,nper,loan amount)
Canada: -PMT(.00575,300,100000) = $700.42
USA: -PMT(.00583,300,100000) = $706.78
How to Make the Calculation
There are several ways to compute mortgage payment. You can use a mortgage calculator, a spreadsheet program like Excel, or in some cases, real estate investment software.
Whatever method you use, though, hopefully by knowing the difference between how mortgages are treated here in the United States versus those in Canada, as well as how to compute them, you will get the results you desire.
Mar/090
Interest loans for earthquakes of Abruzzo
According to the press release from the Revenue on 13 July 2009, were made available to the operational guidelines necessary for the use of tax credit for citizens affected by the earthquake last April 6, for the repair of homes mainly in the form subsidized financing.
By decision of 10 July 2007, the Director of the Revenue has been provided with all necessary information, from the mode of application and instructions for using the tax credit.
The full text is available on the website of the Revenue – http://www.agenziaentrate.gov.it/ilwwcm/resources/file/eb320207481876c/provv_abr_pdf.pdf
Mar/090
Beginning with the procedures for bank transparency
Yesterday the Bank of Italy has published the rules regarding the operation of bank transparency. Through this action is intended to simplify the language of banking procedures and improve the customer-bank relationship.
Bank of Italy published a report which outlined a few things:
The rules are designed to provide customers with clear and accessible, ensuring the accurate perception of all costs related to the services offered, their easy comparability with offers from other intermediaries, the understanding of rights that customers and the ways in conquest can be activated and applied in practice. The new rules, graduate the type of service and customer characteristics which it is addressed, include:
- simplification of the content of documents intended for customers, and – for the latest product diffuse, prevalent as current accounts and mortgages offered to consumers – the adoption of schemes “standard” prepared by the Bank of Italy;
- Clearer illustration of the rights of customers, achieved through the predisposition of some practical guides on models developed by the Bank of Italy;
- Greater immediacy of the information given, especially on the cost of services: the use of summary measures of cost is also required for the reliable and current accounts for the retail customers, as well as for mortgages and consumer credit as currently planned;
- sending to the holder of a summary of all expenses incurred in the year, which allows easily, compare the actual costs of current account with those of similar products on the market
- the discipline of a simple current account, designed on the basic needs of consumers, which will include a certain number of transactions and will be characterized by a fixed annual fee;
- The criteria for the preparation and presentation of documents, is which must be expressed in a simple and clear language.
The key point of the new provisions and obligations of transparency and complementarily is between organizations of brokers. Businesses are then asked to adopt procedures to ensure that be given adequate attention to the customer in every phase of making, from the product, sale, up to the management of any complaints.
The rules will be published in the Official Journal; intermediaries are required to adapt by 31 December.
This is the press release in which the Bank of Italy announced the beginning of a new era in which the statements will be readable and you will understand why we pay certain costs.
But banks will keep abreast with the criterion of “good father” or disengaged as they did for the standard Bersani years ago?
Do you remember how much time was spent before the law was respected?
I remain very doubtful about the implementation of this regulation, however, are very happy to see that finally it was noted the problem of banking communities.
I think everyone we dealt with the banks and that each of us knows the complexity of the topic and the need for simplification. We will see later in December the results obtained by this legislation.
Feb/090
Continues to rise in the demand for loans
Spend the stormy waters of the mortgage crisis last year, now the housing market seems to be back on their feet.
Applications for mortgages rose again, up 8% compared to June last year.
According miaeconomia Euribor merit is so low and the renegotiation, in my opinion a lot of influences also the beginning of economic recovery.
While the convenience of buying house is now surely high, the other the severe crisis had delayed purchases of many people. Now the tight mesh of dark economic times is increasing and encourages all buyers who have waited these last two years.
The Euribor this month has touched another record low, but sooner or later rises again as happened in the past, so always remember to evaluate very carefully the type of mortgage that squeeze. Fixed or variable is a question that you must always ask yourself carefully. In our blog you will find several tips on the types of mortgage that exist and how best to adjust the choice of mortgage.
But remember that ultimately only you know your financial situation and your prospects for the future, look for more information on the web and then given final judging.
Jan/090
Mantovani and I noticed the door for the credit
Also noticed move for the families to combat the crisis loans.
The agreement, signed by the Council of Mantua notary, sees the involvement of the three trade union confederations, CGIL, CISL and UIL, UGL union and the major associations.
The initiative aims to help families in crisis who need a point where they can steer the choice of lending institutions.
You have created a one-stop completely free (for now active until the end of the year), which is used as an intermediary between customer and bank.
At no cost we can ask for advice (and nothing more) to this service on those loans which we can access and what is the best choice in a situation where the customer arrives.
A wonderful initiative that should extend throughout Italy to promote access to credit, which in recent months is becoming difficult thing.
Forward with these initiatives!