Many of our borrowers achieve savings of up to 30% of their total interest costs* over the life of their mortgage by choosing a simple interest mortgage.
These savings are achieved as follows: The simple interest mortgage provides for fixed monthly payments of principal allowing for a faster repayment of principal over the life of the mortgage. The decrease of the principal balance is particularly noticeable in the early stages of the mortgage.
Conversely, standard mortgages apply a blended rate based on an interest calculation using semi-annual compounding. As such, standard mortgages typically experience substantially less principal repayment during the early stages of the mortgage term, resulting in a significantly higher interest cost over the life of the mortgage.
The simple interest mortgage does not compute interest on interest as is the case with a standard mortgage in which interest is typically compounded semi-annually.
Monthly payments, which are comprised of a fixed principal component plus interest, typically go down each month as interest costs decrease.
Principal Due = Mortgage Original Balance ÷ [by the # of months amortized] (usually 300).
Interest Due = Outstanding Principal Balance × [interest rate ÷ 365 days a year] × [# days since last payment]. Calculated daily.
The simple interest mortgage is simply that simple.
*Over comparable costs of a standard mortgage with fixed monthly payments of blended principal and interest, with semi-annual compounding, as commonly offered by Chartered Banks and other Canadian Financial Institutions.
Banks and mortgage lenders usually apply a compounded semi-annual rate, essentially applying interest onto interest (e.g. 5.50% interest rate becomes 5.58%).
Cost of borrowing $100,000 would be principal plus interest of $83,117.46 (5.50% interest rate) for a total of $183,117.46. For the same mortgage at the Estonian (Toronto) Credit Union, the rate of 5.5% is applied as simple interest on the declining balance. This results in a total cost of $168,089.75, saving the borrower $15,027.71 over the life of the mortgage!
Another simple analogy would be to compare the half-way point of a 25 year mortgage. After 12.5 years, a borrower with a blended rate would have an outstanding principal balance of $66,334.06. At the same half-way point, the principal balance for our borrower is exactly $50,000 or 50%.