When comparing mortgages in Canada, you’ll see two numbers: the interest rate and the APR. They’re related but different — and understanding the distinction can save you from choosing the wrong mortgage.
For context, the posted 5-year fixed mortgage rate is 6.09% as of August 26, 2026 (Bank of Canada Valet API, series V80691335) — the examples below use illustrative rates to demonstrate the APR calculation, not this specific posted figure.
Interest rate vs APR: the basics
| Feature | Interest Rate | APR (Annual Percentage Rate) |
|---|---|---|
| What it measures | Cost of borrowing the principal | Total cost of borrowing including fees |
| Includes fees? | No | Some fees (insurance premiums, compounding) |
| Which is higher? | Lower or equal | Always equal to or higher |
| What you see advertised | Usually the interest rate | Required to be disclosed in mortgage documents |
| Best used for | Understanding your monthly payment | Comparing total cost across lenders |
How Canadian mortgage APR is calculated
The APR in Canada accounts for:
1. Semi-annual compounding effect
Canadian fixed-rate mortgages are required by law to compound semi-annually, not monthly. This is unusual — most countries use monthly compounding. The result is that the effective rate you pay is slightly higher than the stated rate.
| Stated Rate | Monthly Payment Rate | Effective Annual Rate | Difference |
|---|---|---|---|
| 4.00% | 3.93% (monthly equivalent) | 4.04% | +0.04% |
| 5.00% | 4.89% (monthly equivalent) | 5.06% | +0.06% |
| 6.00% | 5.84% (monthly equivalent) | 6.09% | +0.09% |
| 7.00% | 6.78% (monthly equivalent) | 7.12% | +0.12% |
How this works: A 5.00% rate compounded semi-annually means you pay 2.50% every six months. Over a year: (1.025)² = 1.050625, or an effective 5.0625% annual rate.
For your monthly payment, the lender converts the semi-annual rate to a monthly equivalent: (1.025)^(1/6) − 1 = 0.4124% per month, or about 4.949% annual.
Note: Variable-rate mortgages in Canada typically compound monthly, so their stated rate and effective rate are closer together.
2. Mortgage default insurance premiums
If you put less than 20% down, you must pay CMHC, Sagen, or Canada Guaranty mortgage default insurance. This premium is usually added to your mortgage balance.
| Down Payment | Insurance Premium | On $400K Mortgage | Impact on APR |
|---|---|---|---|
| 5% | 4.00% | +$16,000 | APR increases ~0.25%–0.35% |
| 10% | 3.10% | +$12,400 | APR increases ~0.20%–0.28% |
| 15% | 2.80% | +$11,200 | APR increases ~0.17%–0.25% |
| 20%+ | 0% | $0 | No impact |
When the insurance premium is added to your mortgage balance, you’re paying interest on a larger amount. The APR reflects this higher effective cost.
3. Certain lender fees
Some lender fees — such as application fees, discharge fees, or commitment fees — may be factored into the APR calculation. In practice, most Canadian lenders don’t charge upfront application fees, so this factor is minimal for standard mortgages.
What APR does NOT include in Canada
| Cost | Included in APR? |
|---|---|
| Interest rate (with compounding) | ✅ Yes |
| Mortgage insurance premium | ✅ Yes (if added to balance) |
| Lender application fees | ✅ Yes (if charged) |
| Legal fees ($1,000–$2,500) | ❌ No |
| Appraisal fee ($300–$500) | ❌ No |
| Title insurance ($250–$500) | ❌ No |
| Home inspection ($400–$700) | ❌ No |
| Land transfer tax | ❌ No |
| Property taxes | ❌ No |
| Home insurance | ❌ No |
| Prepayment penalties | ❌ No |
Because the APR excludes many real costs, it under-represents the true cost of homeownership. Use it for comparing lenders, but calculate your full carrying costs separately.
APR comparison example
Two lenders, same interest rate:
| Feature | Lender A | Lender B |
|---|---|---|
| Interest rate | 4.50% | 4.50% |
| Mortgage amount | $400,000 | $400,000 |
| Down payment | 10% | 10% |
| Insurance premium added | $12,400 | $12,400 |
| Lender fee | $0 | $500 |
| APR | 4.73% | 4.78% |
Lender A has a lower APR because it has no application fee. The interest rate is identical, but Lender B costs more in total.
Different rates, different charges:
| Feature | Lender C | Lender D |
|---|---|---|
| Interest rate | 4.40% | 4.55% |
| Mortgage amount | $400,000 | $400,000 |
| Down payment | 20% (no insurance) | 20% (no insurance) |
| Cash-back bonus | $0 | $3,000 |
| APR | 4.44% | 4.47% |
Despite a higher stated rate, Lender D’s cash-back offer narrows the effective cost gap. The APR helps you see the true comparison — but in this case, Lender C is still cheaper over the full term.
Canadian APR vs American APR
If you’ve compared APR figures across the border, note that the Canadian and American APR calculations are different:
| Feature | Canadian APR | American APR |
|---|---|---|
| Compounding convention | Semi-annual (fixed), monthly (variable) | Monthly |
| Includes mortgage insurance | Yes (if premium added to balance) | Yes |
| Includes discount points | Not applicable (Canada doesn’t use points) | Yes |
| Includes broker fees | Not typically | Yes |
| Includes origination fees | Only if charged | Yes |
| Regulatory framework | Bank Act (federal) | Truth in Lending Act (TILA) |
American APR calculations tend to include more fees, making the gap between stated rate and APR larger in the US than in Canada.
When APR matters most
| Scenario | Does APR Help? |
|---|---|
| Comparing two fixed-rate mortgages from different lenders | ✅ Yes — shows total cost difference |
| Deciding between insured and uninsured | ✅ Yes — reveals cost of insurance on total borrowing |
| Comparing fixed vs variable | ⚠️ Limited — variable APR is based on current rate, which will change |
| Comparing mortgage vs HELOC | ❌ Not useful — different products, different APR calculations |
| Understanding your monthly payment | ❌ No — use the interest rate for payment calculations |
How to use APR when shopping for a mortgage
- Always ask for the APR — it’s required by law for lenders to provide it, but it may not be prominently displayed
- Compare APR to APR — use it as an apples-to-apples comparison between lenders offering similar products
- Don’t rely on APR alone — it excludes legal fees, appraisal costs, and prepayment penalty terms, which vary significantly
- Watch for cash-back offers masking higher rates — a lender offering cash-back with a higher APR may still cost more in the long run
- Use the interest rate for budgeting — your monthly payment is based on the interest rate, not the APR