Looking for the perfect mortgage? Methods of payment

There are essentially three ways that conventional and high ratio mortgages can be paid back. These include blended payments, interest only, and declining balance however, the majority of mortgages are paid back on a blended payment plan.

Blended payments

Blended payments allow the borrower to pay off their mortgage by chipping away at both the interest and principal portions with each mortgage payment. On the Fiscal Agents website, we have constructed a Mortgage Amortization calculator that can determine the monthly mortgage payment by taking into consideration the total mortgage amount, applicable interest rate and the amortization period. This calculator can also break each mortgage payment into separate amounts for Principal and Interest for those on the blended payments structure.

Use Mortgage Amortization Calculator

Interest only

Interest Only mortgage payment plans allow the borrower to repay only the interest costs on their mortgage until both interest and principal come due at the end of the term. For example, a $100,000 mortgage at 10% interest would require an annual payment of $10,000 ($100,000 x 10% per year) plus the repayment of the principal at the end of the term (amortization).

This is an expensive mortgage repayment option since interest is being charged on a mortgage balance that never declines. With the payment plans above and below, the balance of the mortgage is constantly declining. However, the entire principal amount is yours to use for the full term of the mortgage.

Declining balance

A declining balance payment plan, as you might have guessed, is a combination of both plans. With a declining balance payment plan, interest is calculated on the outstanding balance of the principal and in a sense, works for the borrower the same way that lump sum payments do. By reducing the principal amount at various intervals, the overall cost of interest is less because the principal is continually decreasing and the lender can only charge interest on the remaining principal.

It is wise to keep in mind that in recent years, these standard payment forms have been continually modified. Many banks have formulated their own specialized mortgage payment options that are in keeping with the various mortgage types that they have on offer.

Links Features & benefits

How are interest rates determined? When to refinance your home