How Mortgage Interest Rates Are Calculated in Canada

Posted on 30th October 2018

Canadian Mortgage Interest Rate Fundamentals

For most Canadians, the biggest financial transaction they will undertake is buying a home. Very few Canadians can afford to purchase their home outright, meaning, most have to qualify for a mortgage. Unfortunately, few Canadians fully understand how mortgages work and are priced. Most know they want a low interest rate, but don’t appreciate what kind of impact a seemingly small 0.25% mortgage interest rate hike will have on the total cost of their mortgage or how it will impact their day-to-day living.

A quarter point rate hike might not seem like a lot, but it adds up. If you have a $200,000 mortgage and an interest rate of 2.8%, you would pay around $926 monthly. With a mortgage rate of 3.6%, that same mortgage will now cost $1,009 per month.

Fixed-Rate or Variable-Rate Mortgages?

One big factor that dictates mortgage interest rates is whether you have a fixed-rate or variable-rate mortgage. The majority of Canadian homeowners have a fixed-rate mortgage; with this, you make the same interest rate mortgage payments each month.

Homeowners like fixed-rate mortgages because they like knowing how much they pay each month and the security of knowing they are protected if interest rates rise.

Nothing is fool proof though, fixed-rate mortgages often come with harsher penalty fees should you break the mortgage.

Homebuyers who want more flexibility and aren’t worried about rising interest rates prefer variable rate mortgages, which fluctuate with the market. Like a fixed-rate mortgage, you make the same monthly payments, but the amount that goes to the principal will fluctuate.

How Is Mortgage Interest Calculated in Canada?

How mortgage interest is calculated in Canada is not a simple question to answer. That’s because it involves a complicated equation and compounding interest. That’s where an easy-to-use mortgage calculator comes in handy.

For starters, it’s important to ask your lender what the effective rate on your mortgage is, because it is often higher than the posted rate.

If your mortgage interest rate is compounded semi-annually, that means the interest is compounded twice a year instead of just once. For example, if you are quoted a mortgage at 6%, because the equation used to determine interest rates compounds, it could really be 6.9%.

There are even some mortgages that are compounded monthly and even daily. The more often a mortgage is compounded, the higher your monthly interest rate will be. That’s why it’s important to understand the difference between the posted rates and effective rates before you get a mortgage.

For those who do want to try figuring it out on your own, you will need your payment amount and the PV facto—that is, the number of months in your mortgage term, or, the total number of payments.

To figure out your interest rate:

  • Principal = (PV Factor) x (Payment)
  • Payment = (Principal) / (PV Factor)

Dividing the principal by the total number of payments will give you the total payment amount.

Determining how mortgage interest rate is calculated in Canada is not easy, which is why it’s easier to use a mortgage loan calculator to find out what the exact interest rates and payments will be.

FAQ’s about How Mortgage Interest Rate Is Calculated

How often is interest compounded on a mortgage in Canada?

It depends on what kind of mortgage you get and the lender you go to. Fixed-rate mortgages in Canada are compounded, by law, semi-annually. Twice a year, unpaid mortgage interest is tacked on to the principal of the loan.

Do mortgage payment go down over time?

No. Whether you secure a fixed-rate mortgage or variable-rate mortgage, the payment stays the same. The amount going toward the principal changes though. Paying off the principal as quickly as possible will reduce the amount you pay in interest.

My credit score is low. Will that affect my mortgage interest rate?

Yes. The lower your credit score the higher the interest rate on your mortgage. The reverse is also true; the higher the credit score, the lower the interest rate on your mortgage will be.

Traditional lenders punish people with lower credit scores by offering them mortgages with higher interest rates. They believe those with a low credit score are more likely to miss a mortgage payment or even default on their loan.

What is a minimum credit score for mortgage Canada?

In Canada, credit scores range from 300 to 900. Because credit scores show how likely you are to pay your bills on time, the lower the score, the better the odds are you could default. To get the best rates, some lenders insist on a minimum score of 680. Alternative lenders on the other hand are not as concerned about credit score and provide mortgages to those with credit scores of 620 or lower.

Can I get lower interest mortgage if my credit score improves?

Absolutely. Banks save their best mortgage interest rates for those with the best credit scores. You can improve your bruised credit by paying your bills on time. It also helps to use your credit more, that’s because your credit score is based on your ability to manage your finances. Just make sure to keep balances on credit cards and other revolving credit at a minimum. All of this will help improve your credit score, which, in turn, can help your get a mortgage with the best interest rates and terms., Helping Canadians Secure Home Equity Loans

If you’re looking at securing a mortgage with the best interest rates and terms, it’s imperative that you understand how interest rates are calculated and apply to your mortgage. The licensed mortgage professionals at can help with that.

Why choose over the big banks or other private lenders? The mortgage experts at are independent. That means they are looking out for your best interest. Canada’s big banks will only push their own products on you, even if it’s not in your best interest.

Because the mortgage professionals at are independent, they have access to hundreds of different lenders. Many specialize in providing mortgages to homebuyers with bad or no credit, unreliable income, or have declared bankruptcy.

To see what kind of mortgage you qualify for, contact today or apply online and a mortgage specialist will set up an appointment at your earliest convenience.

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