This guide is general information, not tax or financial advice. Check your mortgage agreement, and ask your lender or a professional about your own situation.
If you've ever typed your mortgage into an online calculator and found a payment a few dollars off from what your bank charges, you are not imagining it. Canadian mortgages don't compute interest the way most American calculators assume. The difference is small each month, but it adds up, and it matters if you want your balance and equity to be right.
What the law says
The federal Interest Act sets a specific rule for mortgages. Section 6 says that on a mortgage repaid with blended payments (each payment mixes principal and interest, which is almost every home mortgage), no interest can be charged unless the mortgage states the amount of principal and the rate of interest "calculated yearly or half-yearly, not in advance."
Lenders write their fixed-rate mortgages to match. The result shows up on the information box of your mortgage agreement. The sample box published by the Financial Consumer Agency of Canada (FCAC) for a fixed-rate mortgage reads: "This interest is compounded twice per year but charged monthly."
So when your fixed rate is 5.00%, it means 5.00% a year, compounded semi-annually (twice a year), even though you pay every month.
Why compounding changes the real rate
Compounding is how often interest is added to the balance so that it starts earning interest itself. The more often it happens, the more you pay for the same quoted rate.
- Semi-annual (Canada): 5.00% compounded twice a year is 2.5% every six months. Over a year: 1.025 × 1.025 = 1.050625, an effective annual rate of 5.0625%.
- Monthly (typical US loan): 5.00% compounded monthly is 5/12% a month. Over a year: (1 + 0.05/12)^12 = 1.051162, an effective annual rate of 5.1162%.
Same "5%" on paper, but the Canadian version costs less.
The formula
Because you pay monthly but interest compounds twice a year, the lender has to find the monthly rate that adds up to the same thing as 2.5% every six months. For a quoted annual rate j compounded semi-annually:
- Monthly rate: i = (1 + j/2)^(1/6) − 1
Then the usual payment formula applies, where P is the amount borrowed and n the number of monthly payments:
- Payment: P × i ÷ (1 − (1 + i)^(−n))
A US-style calculator skips the first step and uses i = j/12 instead.
A worked example
Take a $400,000 mortgage at 5.00% fixed, amortized over 25 years (300 monthly payments).
Canadian calculation (semi-annual compounding)
- Monthly rate: (1.025)^(1/6) − 1 = 0.412392%
- Monthly payment: $2,326.42
- Interest in the first month: $400,000 × 0.412392% = $1,649.57
- Balance after 5 years (60 payments): about $354,030
US-style calculation (monthly compounding)
- Monthly rate: 5% ÷ 12 = 0.416667%
- Monthly payment: $2,338.36
- Interest in the first month: $1,666.67
- Balance after 5 years: about $354,321
The US method overstates the payment by $11.94 a month, which is $716.40 over a five-year term, and shows a balance about $290 too high at renewal. If the rate stayed at 5% for the full 25 years, the gap in total interest would be about $3,582 ($297,926 against $301,508). We checked these figures with a short script that runs the formula above and the 60-month schedule.
Your own lender's figures can differ slightly because of rounding, the exact payment date or a different payment frequency (biweekly, weekly or accelerated). The method is the same.
Variable-rate mortgages are different
A variable-rate mortgage follows the lender's prime rate, so the rate moves during the term. A few points to know:
- Compounding depends on the contract. The FCAC's sample information box for a variable-rate mortgage also says "compounded twice per year but charged monthly," but lenders don't all do it the same way, and some variable-rate contracts compound monthly. Read the line on interest in your own agreement's information box; it says which one applies.
- Fixed payment or adjustable payment. With some variable-rate mortgages the payment changes when prime changes. With others the payment stays the same and only the split between interest and principal moves.
- The trigger rate. With a fixed payment, if rates rise far enough, the payment covers only the interest. The FCAC describes this as the trigger rate. Beyond it, the balance can grow, and the lender may ask for a higher payment, a lump sum or a switch to a fixed rate.
Lines of credit, including home equity lines, work differently: their own agreement states how interest is calculated.
Why US-built calculators get it wrong
Most budgeting and loan tools were built for the American market, where a mortgage rate is understood to compound monthly. They divide the rate by 12 and move on. For a Canadian fixed-rate mortgage, that gives:
- A payment that is too high by a few dollars to a few tens of dollars, depending on the rate and balance.
- An amortization schedule that drifts: each month a bit too much interest and too little principal, so the balance and your equity look worse than they really are.
- A wrong balance at renewal, which is the number you need when you compare offers or plan a refinance.
Some tools let you pick "semi-annual" compounding. If yours doesn't, the safer choice is to enter your lender's actual payment and check the balance against your annual mortgage statement.
What to check on your own mortgage
- The interest line in your agreement's information box: fixed or variable, and how often interest is compounded.
- The payment and frequency your lender actually charges.
- The balance on your yearly statement, to compare with your own records.
- Your renewal date: the rate can change at each new term, so check the information box again when you renew.
How Indivia helps
In a property's Loans and mortgages tab, add the mortgage with its amount and start date. With the rate, the payment and the term, the balance follows the Canadian schedule, with interest compounded twice a year on fixed mortgages. The Interest compounds setting lets you pick twice a year (semi-annual), monthly or once a year, so a variable-rate mortgage can follow what your contract says.
When the rate changes at renewal, add a rate change. To line the app up with your lender, add a balance from your lender's statement. A loan can have owners of its own, and the property's chart shows its value, debt and equity over time. The app also warns you ahead of the mortgage renewal date. Loans with Canadian semi-annual compounding are part of the Free plan.
Sources
- Interest Act, section 6 (Justice Laws)
- Credit agreement for a fixed interest loan for a fixed amount (Mortgage), FCAC sample information box
- Credit agreement for a variable interest loan for a fixed amount (Mortgage), FCAC sample information box
- Variable rate mortgages with fixed payments (FCAC briefing, 2024)
In Indivia’s help
Indivia keeps the numbers these guides talk about, for every property, account and person in your household.