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How Canadian Mortgages Work

Canadian mortgages differ from those in many other countries in several important ways. The most significant is semi-annual compounding: under Section 6 of the Interest Act, mortgage interest in Canada must be compounded no more frequently than semi-annually. In the United States, monthly compounding is standard. The practical effect is that a Canadian 5% mortgage has a slightly lower effective rate than an American 5% mortgage, meaning marginally lower payments for the same quoted rate.

Another key distinction is the separation between term and amortization. Your amortization period (typically 25 years, or 30 for insured first-time buyers of new builds) is the total time over which the loan is repaid. The term, however, is the length of your contract with the lender, commonly 1 to 5 years. At the end of each term, you renew your mortgage, potentially at a very different interest rate. This renewal cycle is unique to Canada and means that even a “fixed rate” mortgage carries long-term interest rate risk.

Current Mortgage Rate Comparison (Approximate)

Rates shown are representative posted rates and may vary by lender and borrower profile. Always confirm with your lender.

The renewal process is straightforward: your lender will send a renewal offer (typically 30 days before expiry), but you are not obligated to accept it. Shopping around or using a mortgage broker at renewal is one of the most effective ways to secure a better rate. Switching lenders at renewal does not incur prepayment penalties, though it will trigger the stress test. Understanding the interplay between term length, rate type, and your personal financial horizon is essential to minimizing your total interest cost over the life of your mortgage.

Payment frequency also has a meaningful impact. Standard monthly payments result in 12 payments per year. Regular bi-weekly payments split the monthly amount in half and pay every two weeks (26 payments). Accelerated bi-weekly takes half the monthly payment every two weeks, which results in the equivalent of 13 monthly payments per year, shaving roughly 3 years off a 25-year amortization and saving tens of thousands in interest.