Question 1

How does the Canadian mortgage differ from US mortgages?

Accepted Answer

Canadian mortgages compound interest semi-annually (twice per year) as required by law, while US mortgages compound monthly. This means for the same nominal interest rate, Canadian mortgages have slightly lower effective monthly rates and therefore slightly lower payments. The effective monthly rate is calculated as: (1 + annual_rate/2)^(1/6) - 1.

Question 2

What is semi-annual compounding?

Accepted Answer

Semi-annual compounding means interest is calculated and added to the principal twice per year (every 6 months) rather than monthly. This is the standard for Canadian fixed-rate mortgages under the Interest Act of Canada. The nominal annual rate is divided by 2 for each compounding period, then converted to an equivalent monthly rate for payment calculations.

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