Mortgage math

Semi-annual compounding

The Canadian convention for fixed-rate mortgages: the quoted annual rate compounds twice a year rather than monthly. At the same quoted rate, semi-annual compounding costs slightly less than monthly compounding, so a Canadian rate isn't directly comparable to a U.S. monthly-compounded one.

The federal Interest Act requires a blended-payment mortgage to state its rate calculated yearly or half-yearly, not in advance, and Canadian lenders quote fixed rates compounded semi-annually. The practical effect: a 5.00% rate compounded semi-annually has an effective annual cost of about 5.06%, versus about 5.12% if it compounded monthly.

You don't have to do this math yourself, but it's why a generic (monthly-compounding) online calculator can show a slightly different payment than your lender's. Variable-rate mortgages typically compound monthly instead.

Our payment and affordability calculators use the Canadian semi-annual method, so the figure you see should closely match your lender's; the commitment letter is the final word.

Sources

Interest Act, s. 6 (blended-payment mortgages) (Justice Laws (Government of Canada))
Interest on mortgages (Financial Consumer Agency of Canada)

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Amortization

The total length of time it would take to pay your mortgage off completely if the rate and payments stayed the same. In Canada, insured mortgages (under 20% down) are capped at 25 years, or 30 years for first-time buyers and buyers of new builds; with 20% or more down, the lender sets the maximum (commonly 30 years). A longer amortization lowers the payment but raises lifetime interest.

Equity

The difference between your home's current value and your remaining mortgage balance. Equity is what you can borrow against (HELOC, refinance) or what you keep when you sell.

LTV

Loan-to-Value ratio

Loan-to-value ratio: your mortgage balance divided by the property's value (the lower of purchase price or appraised value on a purchase). 80% LTV means 20% equity. Insured purchases can go up to 95% LTV on homes of $500,000 or less; above that, the 10% down-payment tier lowers the maximum.

Monthly payment

Principal + interest payable each month. Canadian fixed-rate mortgages are normally quoted with semi-annual compounding. Most lenders let you switch to accelerated bi-weekly or weekly payments to pay the mortgage off sooner.

Principal

The amount you actually borrowed. Each payment is split between principal (which reduces your balance) and interest. Early years are mostly interest; late years are mostly principal.

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