Why Canadian payments are calculated differently
Under section 6 of the federal Interest Act, a blended-payment mortgage has to state its interest rate "calculated yearly or half-yearly, not in advance." In practice every Canadian lender quotes fixed rates compounded semi-annually. When your mortgage says 5.00%, it means 2.5% charged twice a year, which works out to an effective annual rate of 5.0625%.
An American mortgage quoted at 5.00% compounds monthly instead: 5 ÷ 12 percent, twelve times a year. That's an effective annual rate of about 5.116%. Same headline number, more interest. A calculator built on the American method will overstate a Canadian payment every time.
Worked example: $500,000 at 5.00% over 25 years
- Canadian method (semi-annual compounding): $2,908.02 a month
- American method (monthly compounding): $2,922.95 a month
- Difference: about $15 a month, or roughly $4,500 over the full 25 years
Fifteen dollars sounds small. But if you're stress-testing your budget, comparing lenders, or checking your lender's numbers, you want the figure that matches your actual contract.
The formula
To get a monthly payment from a Canadian rate, first convert the quoted annual rate into an effective monthly rate:
monthly rate = (1 + annual rate ÷ 2)1/6 − 1
The exponent is 1/6 because there are six months in each half-year compounding period. Then use the standard loan payment formula:
payment = P × i ÷ (1 − (1 + i)−n)
where P is the mortgage amount, i is the monthly rate and n is the number of payments (25 years × 12 = 300). For bi-weekly payments the same idea applies, using an exponent of 2/26 and 26 payments a year.
Decoder ring: term vs. amortization
Your amortization is the marathon, the total time to pay the mortgage off, usually 25 or 30 years. Your term is the race you're running right now, usually 1 to 5 years, after which you renew. The rate you enter here is only guaranteed for the term. This calculator assumes it holds for the whole amortization, which it almost never does.
Bi-weekly vs. accelerated bi-weekly: the impostor
Lenders offer two payment schedules with almost identical names that behave very differently.
Regular bi-weekly takes your monthly payment, multiplies by 12, and divides by 26. You pay exactly the same amount per year as you would monthly, just sliced into 26 pieces. Interest savings are tiny, about $1,900 over 25 years in the example below, and they come only from money reaching the balance a little sooner.
Accelerated bi-weekly takes your monthly payment and divides it by two. Because there are 26 two-week periods in a year, you end up making the equivalent of 13 monthly payments instead of 12. That one extra payment a year goes entirely to principal.
Same $500,000 mortgage at 5.00%, 25-year amortization
| Schedule | Payment | Paid off in | Total interest |
|---|---|---|---|
| Monthly | $2,908.02 | 25 yrs | $372,407 |
| Bi-weekly (regular) | $1,342.17 | about 25 yrs | $370,502 |
| Accelerated bi-weekly | $1,454.01 | 21 yrs 6 mos | $311,972 |
Accelerated bi-weekly saves about $60,400 in interest and cuts three and a half years off the mortgage. The cost is about $112 more out of your budget every two weeks compared with regular bi-weekly.
If your pay arrives every two weeks, accelerated bi-weekly lines up neatly with your cash flow. If you're paid monthly, you can get the same effect by increasing your monthly payment by one-twelfth, if your mortgage allows payment increases. Most do. Use the prepayment calculator to model it.
What this calculator doesn't include
The payment shown is principal and interest only. When you budget, add:
- Mortgage default insurance, if your down payment is under 20%. The premium is usually added to the mortgage, so it raises your payment too. The calculator flags this and estimates the premium. Our guide to down payments and mortgage insurance explains the rules.
- Property tax, which some lenders collect with your payment.
- Home insurance, and condo or strata fees if they apply.
- Heating, which lenders include when they calculate how much you can afford.
Lenders also qualify you at a higher rate than the one you'll actually pay. See how the mortgage stress test works before you shop.
A note on variable rates
Variable-rate mortgages in Canada are often calculated with monthly compounding, and some lenders keep your payment fixed while the rate moves underneath it. If you have a variable rate, use this calculator as a close estimate and check your mortgage contract for the exact compounding method.