Semi-Annual Compounding
Composition semestrielle in French
Quick definition
Semi-annual compounding is the legally required convention for Canadian fixed-rate mortgages: interest compounds twice a year, not monthly. A quoted 5% works out to about 5.06% effective annually, slightly cheaper than the same quoted rate compounded monthly, US-style.
A convention written into federal law
Under the federal Interest Act, a Canadian fixed-rate mortgage must state its rate as interest compounded semi-annually, not in advance. That phrase, which appears in virtually every fixed mortgage document in the country, means interest joins the principal twice a year rather than every month.
The law dates back to the 1880s and was meant to make loan pricing comparable and honest. Its modern effect is subtler: it makes Canadian mortgage math different from American mortgage math, and different from what many online calculators quietly assume.
What a quoted 5% really costs
The mechanics are plain compound interest. A quoted 5% means 2.5% per half-year, and compounding two half-years gives (1 + 0.05/2) squared minus 1, which is 5.0625% effective annually. The monthly factor used to compute payments is (1.025) to the power of one sixth, minus 1: about 0.4124% per month.
The US convention compounds monthly instead: 5% divided by 12 is about 0.4167% per month, an effective annual rate of about 5.12%. Same sticker rate, but the Canadian monthly factor is lower. At identical quoted rates, a Canadian fixed mortgage costs slightly less than its American twin.
Canada vs. the US: same rate, different payment
The gap is small per month but real. On a $400,000 mortgage amortized over 25 years at a quoted 5%, the two conventions produce different payments.
| Convention | Monthly factor | Monthly payment |
|---|---|---|
| Canadian (semi-annual) | 0.4124% | ~$2,326 |
| US (monthly) | 0.4167% | ~$2,338 |
Why calculators disagree
Roughly $12 a month adds up to about $3,600 over the amortization. More importantly, it explains why a US mortgage calculator overstates a Canadian payment at the same quoted rate, and why our Mortgage Calculator follows the Canadian convention. Neither tool is broken; they follow different laws.
One boundary to know: the semi-annual convention covers fixed mortgages. A variable-rate mortgage typically compounds monthly instead, so check your contract before applying the formulas above.
Nominal vs. effective, in one breath
The quoted 5% is a nominal rate; the 5.0625% is the effective annual rate, what a year of borrowing actually costs once compounding is counted. Whenever two products quote the same number, the effective rate is the honest comparison. The compound interest article covers nominal and effective rates in more depth.
In Canada
The "not in advance" wording matters too: interest for a period is charged at the end of the period rather than the start. Together with semi-annual compounding, it standardizes how every federally regulated lender expresses fixed mortgage rates, so a quoted rate at one Canadian lender is directly comparable to the same quote at another.
The convention is one of several quiet differences between Canadian and US mortgages, alongside shorter terms and renewal risk. When you read American personal-finance advice or use American tools, remember that the payment math does not transfer exactly.
Worked example
Take a quoted 5% on a Canadian fixed mortgage. Half a year of interest is 2.5%. Two half-years compound to 1.025 x 1.025 = 1.050625, so the effective annual rate is 5.0625%. For the monthly factor, take the sixth root of 1.025: about 1.004124, or 0.4124% per month.
On a $400,000 balance amortized over 25 years, that factor produces a payment of about $2,326 per month. A US-style calculator dividing 5% by 12 gives about $2,338 instead. Both are internally correct; only the Canadian one matches what your lender will actually charge.
Related terms
Reviewed by Alexandre Bernier, CFP®, CIM®, PFP®·Updated July 2026