Published: October 15, 2015 • Last updated: January 6, 2021 at 7:35 am
Demystifying Interest Adjustments when closing a home
Sometimes first time buyers are confused by an extra closing cost they maybe did not anticipate called an Interest Adjustment. A client asked me this question earlier in the week:
“I wanted to know from when I need to start making my mortgage payments. Based on the schedule you had provided earlier, the payments have to be made from the 1st of November Correct? If that is the case, how come I won’t be paying starting October given that the closing happens on 28th of September. I am a little confused. Let me know when you have a moment.”
Here is how I answered the question:
“Unlike your rent or cell phone bill which you pay each month in advance, your mortgage payment is made after the fact. In other words, on November 01, you might make your payment for the month of October.
So what happens is you will prepay a few days’ interest on your closing date – it is called an interest adjustment (to address the stub period between closing on September 28th and October 01) and your lawyer should explain all that when you go into sign papers.”
How do interest adjustments work?
When you close your purchase mid-month, you might have to prepay a few days’ interest on your closing date – it is called an interest adjustment, and it’s to address the stub period between closing date and the beginning of the next month.
It depends on your specific lender and how they approach this interest adjustment date.
Some mortgage lenders will set your first payment exactly one month after your purchase completion date. In that case, the stars are aligned perfectly, and you can skip to the next section of this article. No Interest Adjustment for you.
Other lenders prefer to collect from you on the first day of the month. And in this case, unless your purchase date is also on the 1st, there will be a partial month’s interest your lawyer will collect from you, to adjust things until everything aligns perfectly.
The next section of this article is from my colleague Rob McLister’s website Canadian Mortgage Trends.
Interest adjustment dates tend to commonly fall on the 1st day of the month after mortgage funds are advanced to the borrower. For example, suppose you close your mortgage on October 25th and have signed up for monthly payments. Here is how the dates might stack up:
- October 25: Mortgage starts (a.k.a. the closing date)
- November 1: Interest adjustment date
- December 1: First payment date
- Your first full payment on December 1 will therefore be based on the interest that accrued since your interest adjustment date (i.e. from November 1 to November 30 )
If you plan to make bi-weekly payments, then instead of one month after, your first payment would be two weeks after the interest adjustment date. Lawyers and notaries routinely collect interest adjustments at closing. Confirm this when you discuss your closing costs with them.
Keep in mind, it is possible to avoid interest adjustments altogether. To do so, you need to schedule your first mortgage payment exactly one payment period (e.g. one month) after your closing date.
Thanks again, Rob….I saw no point in reinventing the wheel here; he explained it very well.
- All the Surprise Closing Costs You Need to Budget For
- First Time Home Buyers Ontario: Everything You Need to Buy Your First Home
- Rising Interest Rates And How They Impact Your Mortgage
- Rising Interest Rates and Your Mortgage
- Higher dollar means higher interest rates
Ross Taylor is recognized by his peers as one of Canada's pre-eminent difficult mortgage specialists. His ASKROSS blog and column in Canadian Mortgage Trends are focused on the intersection between mortgage financing and personal credit.
With unique dual certification as a licensed credit counselor and mortgage agent, Ross's insights are valued by mortgage professionals and homebuyers alike.
If you have questions about anything financial or mortgage-related, please contact [email protected]. Ross answers everyone personally.
For more information, visit About Ross Taylor.