So, now before I pay any of my payments, rather of owing $375,000 at the end of the very first month I owe $376,718. Now, I'm a hero, I'm not going to default on my home mortgage so I make that first mortgage payment that we determined, that we determined right over here.
Now, this right here, what I, little asterisk here, this is my equity now. So, keep in mind, I started with $125,000 of equity. After paying one loan balance, after, after my first payment I now have $125,410 in equity. So, my equity has actually gone up by precisely $410. Now, you're most likely saying, hi, gee, I made a $2,000 payment, an approximately a $2,000 payment and my equity only went up by $410,000.
So, that really, in the start, your payment, your $2,000 payment is mainly interest. Only $410 of it is primary. However as you, and then you, and then, so as your loan balance goes down you're going is wesley financial group legit to pay less interest here therefore each of your payments are going to be more weighted towards principal and less weighted towards interest.
This is your new prepayment balance. I pay my mortgage once again. This is my new loan balance. And notification, currently by month two, $2.00 more went to principal and $2.00 less went to interest. And throughout 360 months you're going to see that it's a real, substantial difference.
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This is the interest and primary parts of our home loan payment. So, this whole height right here, this is, let me scroll down a bit, this is by month. So, this whole height, if you see, this is the specific, this is exactly our mortgage payment, this $2,129. Now, on that very first month you saw that of my $2,100 only $400 of it, this is the $400, only $400 of it went to really pay down the principal, the real loan quantity.
The majority of it went for the interest of the month. However as I start paying for the loan, as the loan balance gets smaller and smaller sized, each of my payments, there's less interest to pay, let me do a much better color than that. There is less interest, let's say if we head out here, this is month 198, over there, that last month there was less interest so more of my $2,100 actually goes to pay off the loan.
Now, the last thing I wish to speak about in this video without making it too long is this concept of a interest tax deduction (buy to let mortgages how do they work). So, a great deal of times you'll hear monetary coordinators or real estate agents tell you, hey, Home page the advantage of purchasing your home is that it, it's, it has tax benefits, and it does.
Your interest, not your whole payment. Your interest is tax deductible, deductible. And I want to be really clear with what deductible means. So, let's for example, talk about the interest fees. So, this whole time over 30 years I am paying $2,100 a month or $2,129.29 a month. Now, at the beginning a lot of that is interest.
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That $1,700 is tax-deductible. Now, as we go further and further each month I get a smaller sized and smaller tax-deductible part of my real mortgage payment. Out here the tax deduction is actually extremely little. As I'm preparing to pay off my entire home loan and get the title of my home.
This does not mean, let's state that, let's state in one year, let's say in one year I paid, I do not know, I'm going to comprise a number, I didn't determine it on the spreadsheet. Let's state in year one, year one, I pay, I pay $10,000 in interest, $10,000 in interest. how do mortgages work in canada.
And, however let's say $10,000 went to interest. To state this deductible, and let's say before this, let's state prior to this I was making $100,000. Let's put the loan aside, let's say I was making $100,000 a year and let's state I was paying approximately 35 percent on that $100,000.
Let's say, you know, if I didn't have this home loan I would pay 35 percent taxes which would have to do with $35,000 in taxes for that year. Simply, this is just a rough quote. Now, when you say that $10,000 is tax-deductible, the interest is tax-deductible, that does not imply that I can just take it from the $35,000 that I would have normally owed and only paid $25,000.
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So, when I tell the Internal Revenue Service just how much did I make this year, rather of stating, I made $100,000 I state that I made $90,000 because I had the ability to subtract this, not directly from my taxes, I was able to deduct it from my income. So, now if I just made $90,000 and I, and this is I'm doing a gross oversimplification of how taxes really get computed.
Let's get the calculator. So, 90 times.35 is equivalent to $31,500. So, this will amount to $31,500, put a comma here, $31,500. So, off of a $10,000 deduction, $10,000 of deductible interest, I essentially conserved $3,500. I did not conserve $10,000. So, another method to think about it if I paid $10,000 interest, I'm going to, and my tax rate is 35 percent, I'm going to save 35 percent of this in real taxes.
You're deducting it from the income that you report to the IRS. If there's something that you might actually take directly from your taxes, that's called a tax credit - how do mortgages work. So, if you were, uh, if there was some unique thing that you might really subtract it straight from your credit, from your taxes, that's a tax credit, tax credit.
And so, in this spreadsheet I simply wish to reveal you that I actually computed in that month how much of a tax reduction do you get. So, for example, simply off of the very first month you paid $1,700 in interest of your $2,100 home loan payment. So, 35 percent of that, and I got the 35 percent as one of your assumptions, 35 percent of $1,700.
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So, roughly throughout the very first year I'm going to conserve about $7,000 in taxes, so that's absolutely nothing, nothing to sneeze at. Anyway, ideally you discovered this useful and I motivate you to go to that spreadsheet and, uh, play with the assumptions, only the presumptions in this brown color unless you really understand what you're finishing with the spreadsheet.
What I desire to finish with this video is discuss what a home loan is but I think most of us have a least a basic sense of it. But even much better than that in fact go into the numbers and comprehend a bit of what you are actually doing when you're paying a mortgage, what it's comprised of and just how much of it is interest versus how much of it is actually paying down the loan - how do variable mortgages work in canada.