How Canadian Mortgage Payments Are Calculated (Semi-Annual Compounding)
Canadian fixed mortgages compound semi-annually, not monthly. On $500,000 at 4.5% over 25 years: $2,767 a month, not $2,779. The formula and an example.
Canadian fixed-rate mortgages compound interest twice a year, not twelve times, because the Interest Act requires lenders to state the rate on an annual or semi-annual basis. A 4.5% Canadian mortgage therefore has an effective monthly rate of 0.3715%, not 0.375%. On $500,000 over 25 years that produces a payment of $2,767.36; an American-style monthly-compounding calculator gives $2,779.16. The difference is $12 a month, $3,539 over the amortization. Small per month, but it is why many online calculators are wrong for Canada.
The CostToClose mortgage payment calculator uses semi-annual compounding for fixed rates.
The formula
Three inputs: principal P, annual rate r, and number of monthly payments n (amortization in years × 12).
- Convert the annual rate to a monthly rate with semi-annual compounding:
i = (1 + r/2)^(1/6) − 1
For 4.5%: (1.0225)^(1/6) − 1 = 0.003715, or 0.3715% per month. - Apply the standard annuity formula:
Payment = P × i ÷ (1 − (1 + i)^−n)
For $500,000, 4.5%, 300 payments: $500,000 × 0.003715 ÷ (1 − 1.003715^−300) = $2,767.36.
A monthly-compounding calculator skips step 1 and uses r/12 = 0.375%. The gap grows with the rate: at 7% it is about $32 a month on the same mortgage.
Where the first payment goes
| First monthly payment on $500,000 at 4.5% | Amount |
|---|---|
| Interest ($500,000 × 0.3715%) | $1,858 |
| Principal | $910 |
| Total | $2,767 |
This example was computed with the CostToClose calculator. Two-thirds of the first payment is interest. The split reverses around year 15 of a 25-year amortization; in the final year almost all of each payment is principal.
Variable-rate mortgages
Most variable-rate mortgages are also quoted with semi-annual compounding, though some lenders (notably on adjustable-rate products) compound monthly, so read the commitment letter. Two structures exist:
- Fixed payment, variable rate: the payment stays constant; when prime rises, more of it goes to interest and less to principal. If the rate rises past the "trigger rate," the payment no longer covers the interest.
- Adjustable payment: the payment moves with prime each time it changes.
Payment frequency
Switching from monthly to biweekly does not change the math above; it changes how often you pay and, if you choose accelerated biweekly, how much. Regular biweekly is the monthly payment × 12 ÷ 26 ($1,150 on a $450,000 mortgage at 4.5%). Accelerated biweekly is the monthly payment ÷ 2 ($1,245), which slips in one extra monthly payment a year. See Accelerated biweekly payments.
Worked example from the calculator
Buyer with a $556,740 insured mortgage (a $600,000 house, 10% down, premium included), 4.49%, 25 years:
| Item | Amount |
|---|---|
| Monthly rate with semi-annual compounding | 0.3707% |
| Monthly payment | $3,078 |
| Interest in first payment | $2,064 |
| Principal in first payment | $1,014 |
| Balance after the first five-year term | ≈ $489,000 |
What changes the number
- Rate. Each 0.25% on $500,000 over 25 years moves the payment about $70 a month.
- Amortization. 30 years instead of 25 lowers the payment about 9%.
- Compounding basis. Semi-annual (standard) versus monthly: about $12 a month at 4.5%.
- Prepayments. Do not change the contractual payment but shorten the amortization, which is where the savings live.
Who this covers
This is the formula used by Canadian federally and provincially regulated lenders for a standard closed fixed-rate mortgage. Private and alternative lenders sometimes quote differently, and US-style monthly-compounding calculators will not match a Canadian mortgage. That mismatch is the most common source of confusion.
What this doesn't include
- Property tax, home insurance, condo fees, or heat. This is principal and interest only, not the all-in monthly cost of owning.
- What happens if you actually make a lump-sum prepayment mid-term. The formula shows your contractual payment; a prepayment shortens the remaining amortization but doesn't change that payment unless you ask your lender to re-amortize.
- Renewal risk. This formula recalculates at whatever rate you enter today. It says nothing about what your payment will be at your next renewal, when the rate may be different.
- Lender-specific rounding or day-count conventions. A small number of lenders round or calculate interest slightly differently, which can shift the actual payment by a few cents to a few dollars from this formula's result.
- The trigger-rate mechanics of a specific variable-rate product in detail. See Breaking your mortgage and your commitment letter for that.
Questions worth asking a professional
- Ask your lender to confirm in writing whether your specific mortgage compounds semi-annually or monthly. Most fixed-rate products do the former, but not every adjustable-rate product does.
- If you have a variable-rate mortgage, ask what your trigger rate is and what happens to your payment if the Bank of Canada's rate reaches it.
- Ask about your prepayment privileges and how a lump sum actually gets applied. Some lenders apply it to reduce the amortization automatically, others require you to ask.
- Ask what payment you'd be quoted today if your term ended today, as a reference point for what renewal might look like.
Frequently asked questions
Why is my Canadian mortgage payment different from an online calculator?
Most online calculators, especially US ones, compound monthly. Canadian fixed mortgages compound semi-annually by law, which produces a slightly lower payment. Check that the calculator says "Canadian" or "semi-annual."
What is the monthly payment on a $500,000 mortgage in Canada?
At 4.5% over 25 years, $2,767. At 5%, $2,908. At 4%, $2,630. All with semi-annual compounding.
Does semi-annual compounding make Canadian mortgages cheaper?
Slightly. Compounding twice a year instead of twelve times means a marginally lower effective rate: 4.5% nominal is 4.55% effective annually with semi-annual compounding, against 4.59% with monthly.
How is interest calculated between payments?
The monthly rate is applied to the outstanding balance at each payment date. Your lender's annual statement shows the split of each payment between interest and principal.
Do variable-rate mortgages compound the same way?
Usually semi-annual, but some adjustable-rate products compound monthly. Your mortgage commitment states the compounding basis; ask if it is not obvious.
Sources
- Interest Act (R.S.C., 1985, c. I-15), section 6 — checked 14 Sept 2026
- Financial Consumer Agency of Canada, mortgage payments and amortization — checked 14 Sept 2026
- Bank of Canada, understanding mortgage interest — checked 14 Sept 2026
This guide is general information for Canadian home buyers and sellers, checked against the sources listed above on the date shown. It is not legal, tax, or mortgage advice. Rules and rates change; confirm current figures with your lawyer or notary, your lender, or the government office that administers the tax before relying on them.