How this calculator works
A real estate commission is quoted as a percentage of the sale price, but that is not what it costs if you borrow to buy. The commission is part of the price, so a buyer who finances most of the purchase borrows most of the commission as well and pays interest on it for the life of the mortgage. This calculator separates the two pieces. The commission itself is the price multiplied by the combined seller-side and buyer-side rates; in most Canadian transactions the seller pays the whole commission out of the sale proceeds, and the listing brokerage shares it with the buyer's brokerage. The financed share is the commission multiplied by the loan-to-price ratio. The interest attributable to that share is the difference between the payment on the full loan and the payment on a loan without it, multiplied by the number of payments, less the financed amount. Adding the interest to the commission gives the true cost. A commission paid in cash from a large down payment costs less, because nothing is borrowed for it. The model assumes the borrower keeps the mortgage to maturity and makes no extra payments; paying early would reduce the interest attributable to the commission.
Formula
Total rate = seller-side rate + buyer-side rate. Commission = price x total rate. Loan = price - down payment. Financed commission = commission x (loan / price). Monthly rate i = (1 + annual rate / 2)^(1/6) - 1. Interest on the financed commission = (payment on the full loan - payment on the loan without the financed commission) x number of payments - financed commission. True cost = commission + interest on the financed commission.
Worked example
A $500,000 home with $100,000 down, a combined 5% commission and a 5% mortgage over 25 years. The commission is $25,000. The loan is $400,000, so 80% of the commission, or $20,000, is borrowed. The payment on $400,000 is $2,326.42 and the payment on $380,000 is $2,210.10, a difference of $116.32 a month. Over 300 payments that is $34,896, of which $20,000 repays the borrowed commission and $14,896 is interest. The true cost is $25,000 + $14,896 = $39,896, or 1.60 times the quoted commission.
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Frequently asked questions
Is the commission really financed?
Economically, yes. The buyer agrees to a price that includes the seller's commission cost, then borrows against that price. Whether you think of the commission as financed or as paid from the seller's proceeds, the buyer has paid more and borrowed more than if the commission were zero.
Does the calculator assume the buyer pays the commission?
No. It assumes the commission is embedded in the price, which is the usual arrangement in Canada. The split into seller-side and buyer-side rates shows how the total is divided between the two brokerages, not who pays.
How can I reduce the true cost?
Negotiate a lower total rate, put down a larger share of the price so less is borrowed, choose a shorter amortization, or make extra payments. Each reduces the interest attached to the financed share.
Why is the multiple above one?
Because of interest. A commission paid in full in cash has a multiple of exactly one. The more of it you borrow and the longer you take to repay, the higher the multiple rises.