CostCanadian lenders convert your quoted annual rate into an effective monthly rate using semi-annual compounding, then apply that to the standard amortization formula. It's required by law for fixed-rate mortgages and produces a slightly different number than simple monthly compounding.
Why semi-annual compounding exists
The Interest Act, a federal law dating back to 1880, requires that any mortgage on real property in Canada disclose and calculate interest using semi-annual (or annual) compounding, not more frequently, unless the mortgage is repayable in under five years without the option to renew on the same terms. In practice, every major bank and lender applies semi-annual compounding to fixed-rate mortgages. This is the single biggest reason Canadian mortgage math looks different from American mortgage calculators, which typically assume monthly compounding.
The actual formula lenders use
The process has two steps. First, convert your quoted annual rate into a periodic rate based on compounding twice a year:
Step 1: Effective monthly rate
Semi-annual rate = (1 + annual rate / 2)1/6 − 1
Then that effective monthly rate feeds into the standard fixed-payment amortization formula, the same one used everywhere else, to produce your monthly payment based on the loan amount and amortization period.
A worked example
$500,000 loan, 5% rate, 25-year amortization
| Semi-annual compounding (Canadian rule) | $2,914/mo |
| If it were monthly compounding instead | $2,905/mo |
| Difference per month | ~$9 |
Nine dollars a month looks trivial, but it compounds (no pun intended) over a 25-year amortization into a real difference in total interest paid — which is exactly why using a calculator built for Canadian rules, rather than an American one, actually matters. Try your own numbers on the mortgage payment calculator, which applies this formula automatically.
What changes with a variable rate
Variable-rate mortgages are exempt from the semi-annual compounding requirement and are typically compounded monthly instead, since the Interest Act's restriction was written with fixed long-term rates in mind. In practice this means a variable mortgage's stated rate translates more directly into its effective rate than a fixed one's does — one more small factor to weigh when comparing a fixed and variable quote that look similar on paper.
Once you know your payment, see what a 25 vs. 30-year amortization would change, or check your affordability against the stress test before you get too attached to a number.