Table of Contents
What is a Mortgage Payable?
A mortgage is a type of loan that is used to finance the purchase of real estate property. It is called a “long-term” loan because it is usually repaid over a period of several years, often 15 to 30 years.
The property itself serves as collateral for the loan, which means that the lender has a legal claim on the property. If the borrower fails to make the required mortgage payments, the lender has the right to take legal action to foreclose on the property and sell it to settle the outstanding mortgage debt. This is a common legal process that is used to protect the lender’s interests when a borrower defaults on their mortgage.
Mortgages are typically used to purchase homes, but they can also be used to finance the purchase of other types of real estate such as commercial buildings or investment properties. When a borrower takes out a mortgage, they are required to make regular payments to the lender to pay off the loan over time. These payments are typically made on a monthly basis and include both principal and interest.
A mortgage payable is setup on a company’s books to establish the liability owed by the company to a bank. The mortgage payable is then repaid periodically in instalments for a definite period of time, known as the amortization period. The future payments made in respect of the mortgage will be comprised of an interest expense component and a mortgage principal repayment component.
Journal Entries for Mortgage Payable
Journal entry for the acquisition of fixed assets with a mortgage
Where fixed assets, such as a building, are purchased with the use of a mortgage, the journal entry to properly book this transaction includes a few accounts, including Cash (down payment), Mortgage Payable (the actual mortgage amount outstanding), and the Fixed Asset (to recognize the asset acquired).
Example: GoodTime Corporation has just purchased an office building for $1,000,000. GoodTime Corporation paid 10% of the purchase price in cash and financed the remaining 90% of the purchase price with a mortgage from First Capital Bank. The mortgage is amortized over 10 years with an interest rate of 3% per annum.
| Account | ||
|---|---|---|
| Building | $1,000,000 | |
| Cash | $100,000 | |
| Mortgage payable | $900,000 |
Journal entry for a mortgage payment
Mortgages payments are typically calculated using an amortization calculator. Each payment made towards paying down the mortgage is broken down between an interest component and a principal repayment component.
Example: GoodTime Corporation has made its year 1 installment payment of $104,285.64 according to the mortgage amortization table provided by First Capital Bank (below). In year 1, $25,928.42 of the payment relates to interest and $78,357.22 of the payment relates to the mortgage principal repayment.
| Year | Beginning | Payment | Interest | Principal | Ending |
|---|---|---|---|---|---|
| 1 | $900,000.00 | $104,285.64 | $25,928.42 | $78,357.22 | $821,642.81 |
| 2 | $821,642.81 | $104,285.64 | $23,545.12 | $80,740.52 | $740,902.32 |
| 3 | $740,902.32 | $104,285.64 | $21,089.32 | $83,196.32 | $657,706.02 |
| 4 | $657,706.02 | $104,285.64 | $18,558.82 | $85,726.82 | $571,979.23 |
| 5 | $571,979.23 | $104,285.64 | $15,951.36 | $88,334.28 | $483,644.98 |
| 6 | $483,644.98 | $104,285.64 | $13,264.58 | $91,021.06 | $392,623.96 |
| 7 | $392,623.96 | $104,285.64 | $10,496.10 | $93,789.54 | $298,834.44 |
| 8 | $298,834.44 | $104,285.64 | $7,643.39 | $96,642.25 | $202,192.23 |
| 9 | $202,192.23 | $104,285.64 | $4,703.93 | $99,581.71 | $102,610.55 |
| 10 | $102,610.55 | $104,285.64 | $1,675.03 | $102,610.55 | $0.00 |
| Account | ||
|---|---|---|
| Mortgage payable | $78,357.22 | |
| Interest expense | $25,928.42 | |
| Cash | $104,285.64 |
