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How to Calculate Mortgage Interest in Canada (Formula + Examples)

Updated

Mortgage interest is charged on the balance you still owe, at a periodic rate worked out from your annual rate. The arithmetic is simple once you know how your rate is compounded, which in Canada differs between fixed and variable rates. This page, part of the mortgage rates hub, sets out the formulas and works through an example you can check against the Financial Consumer Agency of Canada’s own figures.

How Canadian mortgage rates are compounded

Under section 6 of the Interest Act, a mortgage repaid in blended payments of principal and interest (or on a sinking-fund plan, or with an allowance of interest on stipulated repayments) must state the principal and the interest rate calculated yearly or half-yearly, not in advance; if it doesn't, no interest can be charged on the principal. Lenders such as BMO and CIBC quote fixed rates on the half-yearly basis. BMO states that “the interest rate for a fixed rate mortgage is calculated half-yearly, not in advance” and that its variable rates are “calculated monthly, not in advance”; CIBC says that on a fixed-rate mortgage “interest is compounded semi-annually, not in advance.” Your mortgage documents state which basis applies to yours. The semi-annual compounding page covers the convention in more depth.

Step 1: turn the annual rate into a monthly rate

For a rate compounded half-yearly (2 periods a year) and paid monthly:

Monthly rate = (1 + annual rate ÷ 2)^(1/6) − 1

The half-year rate is the annual rate divided by two, and six monthly periods compound to one half-year, hence the power of 1/6.

For a rate compounded monthly (12 periods a year), the monthly rate is simply the annual rate ÷ 12.

At a fixed rate of 5.00%, the half-year rate is 2.50%, and the monthly rate is (1.025)^(1/6) − 1 = 0.4124%. Twelve of those monthly rates add up to 4.949% a year, and compounded over a full year they come to 5.0625% (the effective annual rate). The same 5.00% compounded monthly would be a monthly rate of 0.4167% and an effective annual rate of 5.1162%, so the same quoted rate costs a little more when it is compounded monthly.

Step 2: the monthly payment

With the monthly rate i, the loan amount L and the number of monthly payments n (the amortization in years × 12):

Payment = L × i ÷ (1 − (1 + i)^−n)

The worked example below uses the mortgage in the FCAC’s interest table: $300,000 over 25 years at 5.00%. Compounded half-yearly, the payment comes to $1,744.81 a month, the same as the FCAC’s published $1,744.81.

Step 3: split each payment into interest and principal

Each month:

  • Interest = balance at the start of the month × monthly rate
  • Principal = payment − interest
  • New balance = old balance − principal

The first months of the FCAC example ($300,000, 5.00% compounded half-yearly, 25-year amortization), with interest rounded to the cent each month in months 1 to 3. The month-12 row starts from the balance after 11 payments computed without that rounding, so its opening balance can differ from a cent-by-cent run by a few cents.

MonthOpening balancePaymentInterestPrincipalClosing balance
1$300,000.00$1,744.81$1,237.17$507.64$299,492.36
2$299,492.36$1,744.81$1,235.08$509.73$298,982.63
3$298,982.63$1,744.81$1,232.98$511.83$298,470.80
12$294,299.38$1,744.81$1,213.67$531.14$293,768.24

In month 1, interest is 71% of the payment. Each month the balance is a little lower, so slightly less goes to interest and slightly more to principal.

Interest and principal over the whole amortization

Adding up twelve months at a time shows how the split changes. A year’s interest is the year’s payments minus the drop in the balance over the year.

Year-by-year totals for the same mortgage.

YearPaymentsInterestPrincipalBalance at year end
1$20,938$14,706$6,232$293,768
5$20,938$13,345$7,593$265,523
10$20,938$11,219$9,719$221,388
15$20,938$8,496$12,442$164,893
20$20,938$5,012$15,926$92,574
25$20,938$551$20,387$0

Over the first five years the interest comes to $70,211.42 (the FCAC’s table: $70,211.42), and over all 25 years to $223,444.49 (FCAC: $223,444.49), assuming the rate never changes. In practice it is reset at each renewal.

For a full month-by-month table on your own numbers, use the mortgage amortization schedule. How a different rate changes these totals is worked through on the basis points page.

Variable rates compounded monthly

When the rate is compounded monthly, a month’s interest is the balance × the annual rate ÷ 12. On the same $300,000 balance at 5.00% compounded monthly, the first month’s interest would be $1,250.00, against $1,237.17 at 5.00% compounded half-yearly. On a variable-rate mortgage with fixed payments, a rate rise sends more of each payment to interest, up to the trigger rate at which none of it reaches principal.

Interest before the first payment: the interest adjustment

If your mortgage is funded on a day other than the one your payment schedule starts from, you pay interest for the days in between. CIBC’s glossary gives the example of a purchase that closes on March 15 with payments on the first of the month: the interest adjustment date is April 1, you pay interest only for March 15 to April 1, and the first regular payment is due May 1. As a rough guide, 17 days of interest on $300,000 at 5.00% is about $699 (balance × rate × days ÷ 365). The exact amount and when it is collected depend on the lender: RBC’s advice is to “ask how interest is collected to the interest adjustment date.”

Paying less interest

Interest is charged on the balance, so anything that brings the balance down sooner lowers the total.

  • Accelerated payments. The FCAC explains that accelerated payments “allow you to make the equivalent of one extra monthly payment each year”: accelerated biweekly means paying half the monthly payment every two weeks, 26 times a year.
  • Prepayments. Closed mortgages may let you pay extra each year up to a limit; the FCAC notes your lender “calls it a prepayment privilege” and that “these privileges vary from lender to lender.” See extra mortgage payments.
  • A lower rate or shorter amortization at purchase or renewal. See how to get the best mortgage rate.

Accelerated biweekly on the FCAC example. Half the monthly payment, $872.41, paid 26 times a year at the same 5.00% compounded half-yearly (a biweekly rate of (1.025)^(1/13) − 1), pays the mortgage off in about 21.5 years instead of 25, with total interest of about $187,183 instead of $223,444, a difference of $36,262. (Number of payments = log of (payment ÷ (payment − balance × biweekly rate)) in base (1 + biweekly rate).)

The accelerated biweekly payments page compares the payment schedules in more detail.

Sources

The figures and rules on this page come from these sources, last checked against them between September 29, 2026 and October 2, 2026. How we check facts.