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Path: utzoo!watmath!kpmartin
From: kpmartin@watmath.UUCP (Kevin Martin)
Newsgroups: can.general
Subject: Re: Canadian vs American Mortgage Calculation
Message-ID: <9751@watmath.UUCP>
Date: Wed, 7-Nov-84 18:23:40 EST
Article-I.D.: watmath.9751
Posted: Wed Nov  7 18:23:40 1984
Date-Received: Fri, 9-Nov-84 04:41:39 EST
References: <183@utcs.UUCP>
Reply-To: kpmartin@watmath.UUCP (Kevin Martin)
Organization: U of Waterloo, Ontario
Lines: 23

>Does anyone know what the difference is in the Canadian way
>of calculating mortgages?  What are the correct formulas to use?

I think I remember a difference in the relation between the actual monthly
rate and the quoted annual rate:
One calculation is:
   monthly_rate = annual_rate / 12
 
Since interest is compounded monthly, this means that the interest over
a year (if no payments were made) would actually exceed principal*annual_rate.
 
The other calculation is:
   monthly_rate = 12th root of (1 + annual_rate)  - 1
which, when compounded monthly, gives the correct actual annual rate.
 
e.g. for a 12% quoted annual rate, one calculation gives 1% monthly, the
other gives 0.95% monthly. The 'actual' interest paid annually using the
first calculation is 12.68%. On a $50000 principal, this makes a $25 per month
difference.

Unfortunately, I don't remember which is the US way. You can compensate for
this difference when using a mortgage program by fudging the interest rate
you tell it to use.