Glossary
Cost of Borrowing
The total cost of credit disclosed to a borrower, including interest and certain required fees, often expressed as an annual percentage rate..
Cost of borrowing is the total cost of credit on a loan or mortgage, disclosed to you in writing, that includes the interest you pay plus certain required fees. In Canada, federally regulated lenders such as banks must provide this disclosure under the Cost of Borrowing (Banks) Regulations, with consumer protection oversight from the Financial Consumer Agency of Canada (FCAC).
What the disclosure shows
A cost of borrowing disclosure typically presents two figures: the annual percentage rate (APR) and the total cost of borrowing over the term. The APR converts interest and certain required fees into a single annual percentage, which lets you compare offers that have different rate-and-fee mixes. The total cost figure shows, in dollars, what the credit costs over the term.
Items commonly folded into the calculation include the interest charged, required lender or administration fees, and premiums for mortgage default insurance where the mortgage is high-ratio. Optional products, such as optional creditor insurance, and charges that depend on future events, such as a prepayment penalty, are generally not part of it.
Why it matters for a mortgage
A low headline rate does not always mean the cheapest mortgage. One lender may advertise a lower rate but charge a lender fee, while another offers a slightly higher rate with no fee. Comparing only the rates can mislead, because the APR is designed to level that comparison. Borrowers also get to see the total cost of borrowing over the term rather than only the monthly payment.
- Compare the APR, not just the posted or discounted rate.
- Check which fees are included and which are extra at closing costs.
- Keep in mind that changing the term, amortization, or payment frequency changes the total.
When you receive it
For a mortgage, the lender's disclosure statement sets out the cost of borrowing before or at the time funds are advanced, and further disclosure applies at renewal. The interest portion is calculated using the contract rate and the compounding method. Federally regulated banks follow the federal regulations; provincially regulated lenders, such as credit unions and some loan companies, follow provincial rules, and Quebec applies its own cost-of-credit requirements. Confirm the current rules with the lender or the FCAC.
Frequently asked questions
Is the cost of borrowing the same as my mortgage interest rate?
No. The interest rate is only one input. The cost of borrowing is broader: it includes interest plus certain required fees, and it is often summarized as an annual percentage rate. That is why two mortgages with the same rate can show different costs of borrowing when one carries a lender fee and the other does not.
Which fees are included in the cost of borrowing?
It varies by lender and product, but required charges to obtain the credit, such as lender or administration fees and default insurance premiums on a high-ratio mortgage, are typically included along with interest. Optional items such as optional creditor insurance, and event-based charges such as prepayment penalties, generally are not. Ask the lender for the itemized disclosure.
Do all Canadian lenders have to give a cost of borrowing disclosure?
Federally regulated banks must follow the federal Cost of Borrowing Regulations. Provincially regulated lenders such as credit unions follow provincial consumer protection rules, and Quebec has its own cost-of-credit disclosure regime. The format and content can differ between lenders, so read each disclosure and confirm the details with the lender or the FCAC.
Sources
Related terms
- Annual Percentage Rate (APR) — The Annual Percentage Rate (APR) expresses the yearly cost of borrowing including certain fees, not just the interest rate, for easier comparison.
- Disclosure Statement — A document a lender or mortgage broker must give you that sets out the true cost of a mortgage, including the interest rate, APR, payments, fees, and key terms.
- Closing Costs — Closing costs are the one-time fees, taxes, and charges paid on top of a home's purchase price, separate from the down payment.
- Mortgage Interest — Mortgage interest is the cost a lender charges for borrowing mortgage money, expressed as an annual percentage rate applied to your outstanding balance.
- Prepayment Penalty — A prepayment penalty is the charge a lender applies when you break a mortgage early or prepay more than your contract's prepayment privileges allow.