Homeownership puts you in charge of many tasks you likely never had to handle as a tenant. As a homeowner, you will be responsible for every maintenance task in your home unless you have bought a condo. Apart from bracing yourself for the many responsibilities of homeownership, you must also prepare for the expenses, the biggest one being your mortgage payments. And this is exactly what we will cover today. We will focus on the key points regarding your first mortgage payment so you can stay financially ready. Without further ado, let’s begin!
When Does the Clock Start on Your Mortgage Payments in Canada?
Contrary to what many think, your first mortgage payment doesn’t come right after you get the keys to your new home. The first mortgage payment is usually due on the first day of the month after you have had a complete month in your new home. Let’s say, on April 20, you close on your new home. One month from your closing day in Canada lands on May 20. Hence, your first payment would be due on the first day of the following month, i.e, June 1.
However, if paying on the first of every month doesn’t suit you, you can usually change it. Many Canadian lenders allow you to select the specific day of the month that works best for your budget.
Interest Rate Adjustment - Prepaid Interest for Days Before Your First Mortgage
You must probably be wondering now, “Am I skipping a mortgage payment?” After all, your first mortgage payment is more than a month after you receive the keys to your new place in Ontario. But in reality, you do not skip any payments.
That’s because mortgage payments in Canada are made in arrears, meaning your payment covers the interest for the previous month. Hence, referring to the April 20 example, your June 1 payment will actually cover May's interest.
However, what about the days between April 20 (your closing date) and May 1?
Well, this is where the interest adjustment comes in. Interest adjustment is a one-time payment that covers the interest from your closing date to the end of that month. Using the April 20 example, you will have to pay an upfront interest adjustment amount to cover the interest from April 20 to April 30. You must pay this interest adjustment when you close on your house in Canada.
Amount to Hand Over for Your First Mortgage Payment in Canada
The exact amount depends on your loan size, interest rate, property tax rate, and insurance cost. Usually, the initial mortgage payment in Canada covers the principal portion and the interest owed on your mortgage.
With a fixed-rate mortgage in Canada, the amount you pay toward principal and interest stays consistent throughout your loan term. The only time this may change is when your mortgage comes up for renewal. With an adjustable-rate mortgage, the overall monthly payment usually remains the same. But the split between principal and interest shifts over time. For example, if interest rates increase, a bigger chunk of your payment will go toward interest, leaving less to reduce your loan balance.
Let’s suppose you are buying an $800,000 home with a 20% down payment, i.e., $160,000. Your mortgage interest rate is 5%, your term is 5, and your amortisation is 25 years. According to the WOWA Mortgage Interest Calculator, your first principal payment will be $1,056, and your interest payment will be $2,667. In short, your complete first mortgage payment will be $3,722. This mortgage payment calculation excludes the property taxes and insurance.
Little-Known Fact: The Day You Close Affects Your Monthly Payments
When buying a home, one small detail can have a significant impact on your finances: your closing date. The date you close on your new home determines both the timing of your first mortgage payment and the upfront interest cost.
● Closing at the Beginning of the Month
If you choose to close at the beginning of the month, say on the 3rd, you will need to pay a larger amount of prepaid interest at closing. The lender calculates interest daily from the closing date until your first mortgage payment date. However, on the upside, the May 3 closing would push your first payment to July 1, almost two months later.
● Closing at the End of the Month
Closing at the very end of the month has a clear advantage: your upfront prepaid interest is the lowest, only a few days’ worth. For example, a May 29 closing might require just three days of interest upfront.
The trade-off is that your first mortgage payment will arrive sooner, typically on the first of the month following the next. In this scenario, the May 28 closing could lead to a July 1 payment, just over a month away.
● Closing in the Middle of the Month
Choosing a mid-month closing is often the “Goldilocks” option. This closing date balances upfront costs with the timing of your first mortgage payment. By scheduling your closing for the middle of the month, you significantly save on prepaid interest. Additionally, your first payment won’t arrive as quickly as it would with an end-of-month closing.
The best closing date for you depends on your cash flow, financial comfort, and the cushion you want before the first mortgage bill arrives.
Set Yourself Up for Easy, Stress-Free Mortgage Payments
In case you didn’t know, missing even a single mortgage payment can set off a chain reaction of financial consequences. These consequences can make future borrowing more expensive and complicated. That’s why it’s crucial to be proactive and prepare well in advance for your mortgage payments.
Start by reviewing your mortgage documents to understand clearly when and how much you owe each month. Consider setting aside the full mortgage payment in a dedicated account. Automating your payments through your bank is another smart move to ensure you never miss a mortgage payment. By taking these steps, you can confidently manage your mortgage payments and build a solid foundation for your financial future.