What is an Interest Rate?

Definition of Interest Rate

Interest is the money charged by a lender to a borrower as the cost of taking out a loan.

An interest rate is the basic concept of financing a transaction. Interest is the fee paid by the borrower to the lender for use of the lender’s money over a period of time. The interest rate is calculated based on a percentage of the outstanding balance of money loaned. The higher the interest rate, the higher the fee paid by the borrower to the lender.

Interest rates charged by financial institutions are determined in part by market forces, and in part by government influences by public institutions such as the Bank of Canada. Like the prices of goods, interest rates will rise and fall, depending on the market and other economic factors. Rates will often change on a daily basis.

When you make your monthly payment on your mortgage, a portion of the payment will be used to pay towards the principal or outstanding balance of the loan. Another portion of the payment will be paid to the bank as interest, their fee for loaning you money. How much of a fee you pay is based on the interest rate in your loan.

The goal of most borrowers is to obtain the lowest interest rate possible over the entire period of the loan. Contact us today to get started!

Examples

1. Mr. McGillicuddy takes out a $200,000 mortgage, with a 25 year amortization rate, 7 year term and a 5% fixed interest rate. The monthly payment will be $1,163.21. After the first year, he will have made 12 monthly payments, totaling $13,958.52. Of the amount paid, $9,804.01 will be paid to the bank in the form of interest.

2. Same example as above, but Mr. McGillicuddy has a 6% interest rate. Because of the higher rate, the monthly payment is $1,279.61. Over the first year, he will pay $15,355.32, or $1396.80 more than with a 5% interest rate. Of that amount, $11,755.96 will be paid to the bank as interest.


The mortgage professionals at First Foundation are committed to achieving that goal for you by providing an assortment of mortgage products to help you obtain the lowest possible rate over the life of your mortgage.

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Last updated Jul 17, 2014