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    Mortgage Interest Calculator Canada

    This Page’s Content Was Last Updated: January, 2025

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    1️⃣ Select your mortgage type ?
    • Purchase: A new mortgage for when you're buying a home.
    • Renewal: When your current term comes to an end, and you're looking for another term with your current lender or by switching to another lender.
    • Refinance: When you're looking to pay off your current mortgage and replace it with an entirely new mortgage, which may allow you to borrow more money or for longer.
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    When you make a mortgage payment, your payment usually goes toward repaying the principal and interest. Your regular mortgage payments will stay the same for the term, but the allocation of money to the principal balance or interest will alter over time.
    As the element that goes toward the principal begins to lower the principal balance, your mortgage will continually reduce over time. A smaller principal balance means you pay less interest. Because your monthly mortgage payment stays the same, the amount paid toward your principal will become a more significant proportion of this payment over time. When you start a mortgage, the element of the monthly repayment going toward the interest is higher. As you near the end of the mortgage term, the part of the monthly payment going toward interest will be much smaller.
    The allocation of the monthly repayment will depend on your mortgage type. Fixed-rate mortgages have an interest rate that doesn’t change. The principal is paid off increasingly faster as the mortgage term progresses.

    Variable-rate mortgages have an interest rate that can change. While the monthly mortgage payment doesn’t change, the portion going towards interest will change. If interest rates rise, more of your mortgage payment will go toward interest, reducing the amount of principal being paid off. Consequently, your mortgage will be paid off more slowly than scheduled. If rates fall, your mortgage will be paid off faster.

    What is a Mortgage Principal?

    A principal is the capital amount borrowed on a mortgage or loan; the principal can also refer to an investment sum. If the principal is a loan, interest will be charged on it. Contrast this with an investor who may earn money on their invested principal. With mortgages, the principal is the amount of money you borrowed and will need to repay. For example, if you buy a house for $500,000 and make a down payment of $100,000, you’ll need to borrow $400,000 from a bank or mortgage lender to make up the difference. Your mortgage principal is, therefore, $400,000.
    Your mortgage principal, the amount you owe, will reduce as you make monthly payments. The amount of interest you pay will depend on the principal balance. A higher principal balance means you will be paying more mortgage interest than later on when the principal balance is lower, assuming the mortgage interest rate remains the same.

    What is Mortgage Interest?

    Lenders charge interest in exchange for allowing you to borrow money. The mortgage interest is charged based on your mortgage’s principal balance. The interest is included in your regular monthly mortgage payments. With every mortgage payment you make, you will be paying towards your mortgage principal and your mortgage interest.

    Your lender sets the monthly mortgage payment so that you’ll pay the mortgage off based on your selected amortization period. Your mortgage payment amount can change when you renew your mortgage of if you refinance your mortgage. Both can alter your mortgage rate, impacting the amount of mortgage interest due. If you are put onto a higher mortgage rate, your mortgage payment will be higher to account for the higher interest charges. Your mortgage payment can also increase if you borrow more money; interest is charged on a larger principal balance.

    There are other costs aside from mortgage interest. Your mortgage may have set-up fees or appraisal fees as part of the application process, which can increase the actual cost of your borrowing. It’s better and more accurate to compare lenders based on their annual percentage rate (APR). The APR reflects the actual cost of borrowing. You can use an APR calculator or manually calculate your mortgage’s APR using the total interest paid, the fees paid, and the loan term length.

    Mortgage Interest Compounding in Canada

    Mortgage Interest in Canada is compounded semi-annually, meaning that even though you pay your mortgage monthly, the interest is only compounded twice a year. Compound interest is interest that applies to the initial principal and the accumulated interest from previous periods; interest is charged on interest. Semi-annual compounding saves you money compared to monthly compounding. That’s because interest on top of your interest is charged less often.

    Let’s start by looking at credit cards to see how this works. Not all credit cards in Canada charge compound interest. For those that do, interest is usually compounded monthly. The unpaid interest is added to the credit card balance, and then interest is charged on this if it remains unpaid. As an illustration, let’s assume you buy an item for $1,000 on your credit card, which has an interest rate of 20%. You don’t repay this amount but leave it on your credit card. For simplification, let’s also assume that the credit card company requires no minimum payment.

    You’ll need to know the daily interest rate to calculate the interest charged. 20% divided by 365 days gives a daily interest rate of 0.0548%. For 30 days, you’ll be charged $16.44 interest. Although interest is calculated daily, it’s only added once a month. Since you’re not making any payments, your credit card balance for the following month will be £1,016.44. Over the months, interest will be added to your balance, meaning that interest is being charged on your existing interest charges. For another 30 days, you’ll be charged $16.71 (the interest rate is applied to the whole balance, including last month’s interest), which makes your new credit card balance $1,033.15.
    The same applies to mortgages in Canada, but interest is compounded semi-annually, not monthly. Your mortgage lender adds unpaid interest to your mortgage balance twice a year.

    Mortgage Effective Annual Rate Formula (EAR) 💡

    To account for semi-annual compounding, you can calculate your mortgage’s effective annual rate (EAR). The number of compounding periods in a year is two. To use the effective annual rate formula below, convert your interest rate from a percent into decimals.
    Mortgage Effective Annual Rate = ( 1 +
    Interest Rate
    2
    ) 2 – 1
    For example, if your mortgage lender quotes a mortgage rate of 3%, then your effective annual rate will be:
    ( 1 +
    0.03
    2
    ) 2 – 1 = 0.030225 = 3.0225%
    If your mortgage lender quotes a mortgage rate of 5%, then your effective annual rate will be:
    ( 1 +
    0.05
    2
    2 – 1= 0.050625 = 5.0625%
    This calculation assumes that interest will be compounded semi-annually, which is the law for mortgages in Canada. For a more general formula for EAR:
    Effective Annual Rate = ( 1 +
    Interest Rate
    n
    ) n – 1
    Where “n” is the number of compounding periods in a year. For example, if interest is being compounded monthly, then “n” will be 12. If interest is only compounded once a year, then “n” will be 1.

    How to Calculate Mortgage Interest

    To calculate mortgage interest, you must first know your mortgage balance, monthly payment amount, and mortgage interest rate. For example, you may want to calculate mortgage interest on a $500,000 mortgage with monthly payments of $2,500 at a mortgage interest rate of 3%, taking into account semi-annual compounding interest.
    To determine how much interest is paid in the first month as part of your monthly mortgage payment, apply the interest rate against the mortgage balance. A 3% mortgage rate on an opening balance of $500,000 gives you annual interest of $15,000. Divide this by 12 to find the monthly interest amount, which, in the first month, would be $1,250. As the monthly payment is $2,500, exactly half of this will go toward the principal and half in interest.
    To calculate mortgage interest for the second month, you must recalculate your mortgage balance. The new balance is $498,750 because you paid $1,250 toward it from your first monthly payment. The interest paid will be 3% applied to the new balance of $498,750 divided by 12 to get a monthly rate, so the interest paid in the second month is $1,246.87. The remainder of your fixed monthly payment of $2,500 will go towards the principal – that’s $1,253.13.
    The point to note here is that the interest payment is very slightly lower while the principal payment is a little higher. You paid $3.13 less interest in the second month compared to the first month, and you paid $3.13 more toward your principal in the second month than the first.
    This process is repeated until the mortgage is fully paid off. Calculating an amortization schedule is an easy way to stay organized. You can use the mortgage interest calculator above to work out your total interest and principal payments and create a downloadable document.

    Bi-Weekly vs Monthly Mortgage Payments

    Bi-weekly mortgage payments mean you make mortgage payments every two weeks. Since the time between payments is reduced, the impact of a lower mortgage balance and lower interest is felt more quickly.

    Accelerated bi-weekly payments also mean you will make more mortgage payments in a year: the payment amount is the standard monthly repayment figure split in half. If you make monthly payments, you’ll make 12 in one year. Bi-weekly payments are made based on the number of weeks in a year, that’s 52. This means you’ll make 26 accelerated bi-weekly mortgage payments, two additional payments, or the equivalent of one extra monthly mortgage payment every twelve months.

    Making more mortgage payments using accelerated bi-weekly payments means you can pay off your mortgage sooner, often a few years earlier, while also saving thousands in mortgage interest payments.

    How Does Amortization Affect Mortgage Interest?

    Your amortization period is the length of time it will take you to pay off your mortgage in full if you follow the regularly scheduled mortgage payments. The longer you owe money, the more interest is charged, so a longer amortization period results in higher total interest paid compared to a shorter amortization period. Conversely, shorter amortization periods require larger mortgage payments to repay the principal more quickly. This will save you money in the long term, but you need to be able to afford the larger payments.

    In Canada, the most common amortization period is 25 years. This is also the maximum allowed for insured mortgages, such as those with CMHC insurance. You can usually choose a longer or shorter amortization period to suit your financial circumstances and goals. So, how does amortization affect your mortgage interest?

    Let’s look at a mortgage with a principal balance of $500,000 and a fixed mortgage rate of 5%. We’ll compare the impact of 15-year, 20-year, 25-year, and 30-year amortizations to see how much interest you will have to pay over the lifetime of your mortgage loan.

    If you choose a 20-year amortization instead of a 25-year amortization, you will have to pay an extra $378 monthly, but you will save $83,857 in interest over 20 years. If you pay an additional $1,033 monthly for a 15-year amortization, you’ll save around double, a total of $163,096 in interest. If you want lower monthly repayments and choose a 30-year amortization, you’ll reduce your monthly payment by $240 but end up paying $88,236 in interest.
    The interest vs. principal ratio also highlights how each option compares. With a 30-year amortization, you’ll pay 92% of your mortgage balance in interest. Choosing a 15-year amortization can cut this ratio by more than half to just 42%. All these calculations assume that you will not make any extra payments and that your mortgage rate remains at 5%. These numbers will change depending on your actual interest rates, but the positions of each option will not.

    Breakdown of Mortgage Payments

    Understanding your mortgage payment structure is essential for identifying ways to save money. Let’s examine mortgage payments and their breakdowns.
    Your mortgage principal balance and your mortgage interest will change during your mortgage term, but something that doesn’t change is your monthly payment amount. Your selected amortization period determines your monthly payment amount, which is fixed for the duration of your term. When you first take out a mortgage, most of your monthly payments will go towards interest.
    As time passes and your balance decreases, less balance remains for interest to be charged on. This reduces the proportion of interest charged compared to your monthly payment. The amount remaining can then go toward paying down your mortgage balance further, similar to compound interest, but in reverse.
    Effects of Amortization on Mortgage Interest
    • Mortgage Principal Balance: $500,000
    • Mortgage Rate: 5% fixed for the entire amortization
    15 Year
    20 Year
    25 Year
    30 Year
    Monthly Mortgage Payment
    $3,941
    $3,286
    $2,908
    $2,668
    Monthly Payment Difference
    (Compared to 25 Year)
    $1,033
    $378
    –
    -$240
    Total Interest Cost
    (Until Mortgage Is Fully Paid Off)
    $209,311
    $288,550
    $372,407
    $460,643
    Total Interest Cost Difference
    (Compared to 25 Year)
    $163,096
    Less Interest
    $83,587
    Less Interest
    –
    +$88,236
    More Interest
    Interest vs Principal Ratio
    42%
    58%
    74%
    92%
    This is one reason why making mortgage prepayments is so vital if you want to save money. Banks and mortgage lenders usually allow you to make monthly mortgage prepayments for closed mortgages up to a specific limit every year. For example, RBC lets you make prepayments up to 10% of your principal, while TD has a limit of 15%. If you stay under these annual limits, you can make prepayments without prepayment penalties.
    Mortgage prepayments are payments that go directly toward paying down your principal balance. Making prepayments can also allow you to pay off your mortgage ahead of schedule. This saves you money and takes you one step closer to becoming mortgage-free.

    Disclaimer:

    • Any analysis or commentary reflects the opinions of https://thelocalbroker.ca/ analysts and should not be considered financial advice. Please consult a licensed professional before making any decisions.
    • The calculators and content on this page are for general information only. https://thelocalbroker.ca/ does not guarantee the accuracy and is not responsible for any consequences of using the calculator.
    • Financial institutions and brokerages may compensate us for connecting customers to them through payments for advertisements, clicks, and leads.
    • Interest rates are sourced from financial institutions' websites or provided to us directly. Real estate data is sourced from the Canadian Real Estate Association (CREA) and regional boards' websites and documents.

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