If you have ever compared a Canadian bank’s payment with an online calculator and found they don’t quite match, compounding is almost always the reason. Canadian fixed-rate mortgages compound semi-annually; most calculators on the internet compound monthly.
The rule
Section 6 of the federal Interest Act requires a blended-payment mortgage to state its rate “calculated yearly or half-yearly, not in advance”. In practice every Canadian lender quotes fixed rates compounded half-yearly. The rate you see, say 5%, therefore means 2.5% every six months.
Converting to a monthly rate
To charge interest monthly, the lender needs the monthly rate that compounds to 2.5% over six months:
monthly rate = (1 + 0.05 / 2)1/6 − 1 = 0.41239%
A US-style calculator would use 5% ÷ 12 = 0.41667%. The difference looks tiny, but it applies to your entire balance every month for 25 years.
Worked example
| $500,000 at 5% over 25 years | Monthly payment | Total interest |
|---|---|---|
| Canadian (semi-annual compounding) | $2,908.02 | $372,407 |
| US-style (monthly compounding) | $2,922.95 | $376,885 |
The semi-annual payment is about $15 a month lower, and roughly $4,500 less interest over the amortization.
Other payment frequencies
The same idea works for any frequency. With p payments a year:
rate per payment = (1 + r / 2)2/p − 1
So a weekly payer is charged (1.025)1/26 − 1 = 0.0950% per week at 5%. Our calculators apply the correct rate for each frequency, which is why accelerated and regular schedules come out exactly as your lender shows them.
What about variable-rate mortgages?
The Interest Act applies to blended payments, and many lenders compound variable-rate mortgages monthly. If your variable mortgage document says “compounded monthly”, the US-style math applies. Check the disclosure statement; it must state the compounding frequency.
Key takeaways
- Canadian fixed rates compound twice a year, so the effective monthly rate is lower than rate ÷ 12.
- Calculators that ignore this overstate your payment and total interest.
- Every calculator on this site uses semi-annual compounding.