Blended payment is a loan repayment method whereby the loan is repaid in equal instalment amounts including the interest on the borrowed sum as well as a part of the principal. However, the interest and the principal in the repayment instalments differ each time. In fact, many people often confuse this type of loan repayments with an amortized loan repayment schedule. Basically, any loan repayment schedule, irrespective of whether the repayment amounts are identical or not, that includes the imbursement of the principal sum over a period of time stretching to insolvency is known as the amortized payment plan. Thus, simply speaking a real blended payment arrangement is one where identical payments are made at specific periods during the term of the mortgage and every imbursement is a combination of the interest as well as the principal sum.
It may be noted here that over the decades the blended payments have been well accepted by most home owners as it allows for advance budgeting owing to the provision of making equal periodic repayments all through the term of the mortgage. The mortgagor and the mortgagee may decide on any periodic payment schedule, but most home loans require a monthly payment schedule. However, it must also be mentioned that with the mortgage market becoming more competitive, weekly, bi-weekly and even semi-monthly loan repayment arrangements are gradually becoming more popular.
Computing the blended payment of a Canadian mortgage comprising a compound interest repaid every month, for instance an eight per cent annual interest rate compounded every month, is basically a simple mathematics. Nevertheless, problems crop as the Interest Act requires a particular check relating to the interest disclosure in the case of blended payment arrangements for a mortgage.
It may be mentioned here that the Interest Act in Canada is only applicable in the instance where the principal amount and the interest on the loan are combined. The reasons behind the restrictions on disclosure of interest imposed by the Act are not difficult to gauge. The constraints are basically owing to the fact that the interest charges of a blended payment are concealed and the borrower is not aware of the exact fraction of the principal and the interest in the payment. Neither does the borrower know the exact interest or what part of the loan is being repaid.
It needs to be emphasized here that the Interest Act in no way tries to regulate the rate of interest charged by the lender. The Act just necessitates that the effective interest rate should be calculated annually or semi-annually, and not in advance.
In this instance, the Interest Act deems the term 'calculated' to denote 'compounded'. Calculations have shown that more often the interest is calculated, the borrower has to pay greater amount as interest and it is eventually beneficial for the lender. Hence, it is very natural that given an opportunity any lender would want that the interest of the loan is compounded more frequently with a view to enable them to earn more revenue on their investment. Generally, nearly all mortgages in Canada quote the frequency of payments as semi-annually and not in advance or upfront and the lenders normally deal with the problem of calculating the interest once in every six months when the mortgage payment requires to be paid every month. In effect, usually the mortgagees grant a discount to the borrowers to recompense this issue. While it is really difficult to work out the complex interest rates of blended payment mortgages, sophisticated computers and calculators have made the task easy for all concerned.
A typical payment schedule organized by a computer for a blended payment includes the total amount to be paid as well as the interest, the principal percentages as well as the unpaid amounts.
To chart blended payment schedule, the interest factors are required. Normally, the blended payment schedules are complex and prepared by a computer. However, if an individual tries to comprehend the fundamental computations, he or she will be able to get some idea regarding the perception behind the blended payments.
