The Rule That Makes Canadian Mortgages Different
Canadian fixed-rate mortgages compound semi-annually, not monthly. It is a legal requirement under the Interest Act, it applies to every fixed-rate mortgage in the country, and it is the reason a Canadian payment calculated with an American formula comes out slightly wrong.
The practical effect is that the monthly rate is not simply the annual rate divided by twelve. It is derived from a rate that compounds twice a year:
effective monthly rate = (1 + annual rate ÷ 2)2/12 − 1
At a 5% posted rate, the American convention gives a monthly rate of 0.416667%. The Canadian calculation gives 0.412392%. The gap looks trivial and is not: over a 25-year amortisation on a large balance it moves the payment and the total interest by a meaningful amount, always in the borrower's favour.
It also means the rate you are quoted is not quite the rate you pay. A 5% posted rate compounds to an effective annual rate of 5.0625%, because the half-year interest itself earns interest in the second half.
Mortgage Insurance Is Not Optional Below 20%
If your down payment is less than 20% of the purchase price, mortgage default insurance is mandatory. The premium is a percentage of the loan and it scales sharply as the down payment shrinks:
| Down payment | Premium rate | On a $500,000 home | Total financed |
|---|---|---|---|
| 5% | 4.00% | $19,000 | $494,000 |
| 10% | 3.10% | $13,950 | $463,950 |
| 15% | 2.80% | $11,900 | $436,900 |
| 20% | None | $0 | $400,000 |
The premium is normally added to the mortgage rather than paid up front, which means you borrow it and then pay interest on it for the life of the loan. Read the table as a whole: moving from 5% down to 20% down reduces the amount financed by $94,000, of which $19,000 is premium you simply stop paying.
The insurance protects the lender, not you. If you default and the property sells for less than the balance, the insurer covers the lender's loss and can pursue you for it.
Payment Frequency Does More Than It Looks
Switching from monthly to accelerated bi-weekly is the most reliable way to shorten a Canadian mortgage without renegotiating anything. The mechanism is arithmetic rather than clever: an accelerated bi-weekly payment is the monthly payment halved, paid every two weeks. Because there are 26 two-week periods in a year rather than 24, you make the equivalent of thirteen monthly payments instead of twelve.
That extra payment goes entirely to principal, and on a 25-year amortisation it typically removes three to four years from the term. Ordinary bi-weekly, by contrast, simply divides the annual total into 26 pieces and finishes at the same time as monthly, the word "accelerated" is doing all the work.
Terms, Amortisation and Renewal
Two numbers that sound similar mean very different things here. The amortisation is how long the mortgage takes to repay in full, commonly 25 years. The term is how long your current rate and conditions last, commonly five years. At the end of each term the mortgage is renewed at whatever rates prevail then.
This is the structural difference from the United States, where a 30-year fixed rate really is fixed for thirty years. A Canadian borrower with a 25-year amortisation on five-year terms faces renewal four times, and each renewal is an exposure to the rate environment of that moment. That is why stress-testing your budget at rates well above today's is not pessimism but planning.
This calculator covers principal and interest only. Property taxes, condo fees, heating and home insurance sit outside it, and lenders include them when assessing what you can afford. This is general information rather than financial advice.