Glossary
Mortgage Interest
Mortgage interest is the cost a lender charges for borrowing mortgage money, expressed as an annual percentage rate applied to your outstanding balance..
Mortgage interest is the cost a lender charges you for borrowing mortgage money, expressed as an annual percentage rate applied to the balance you still owe. It is separate from the mortgage principal, which is the amount actually borrowed and eventually repaid.
How mortgage interest works in Canada
Most closed Canadian mortgages compound semi-annually, not monthly, and the rate you are quoted is normally a nominal annual rate. Because of that compounding, the true annual cost — the effective interest rate — is slightly higher than the figure advertised. Lenders publish a posted rate and then discount it, while variable-rate products are tied to the lender's prime rate, which responds to the Bank of Canada's policy interest rate. Interest is charged on the outstanding balance, so early payments in the amortization are mostly interest and later payments are mostly principal. Fixed rates, by contrast, tend to follow Government of Canada bond yields more than the policy rate.
What affects the interest you pay
- Rate type — a fixed rate locks the interest cost for the term; a variable rate can rise or fall.
- Term length — shorter and longer terms are priced differently.
- Down payment and loan-to-value — a larger down payment means less interest charged over the life of the loan.
- Credit profile and income — lenders price risk, and the federal mortgage stress test requires you to qualify at a higher rate than your contract rate.
- Payment frequency — accelerated or more frequent payments shrink the balance faster and reduce total interest.
Why it matters
Over a typical amortization, interest can account for a substantial share of everything you pay. Two mortgages with the same balance can cost very different amounts depending on the rate, the term and how quickly the balance falls. Interest also drives exit costs: breaking a fixed mortgage early often triggers an interest rate differential calculation, and variable-rate penalties are usually tied to three months' interest. Understanding the mechanics helps you compare offers on total cost rather than on headline rate alone. For a fuller walkthrough, see how mortgage rates work in Canada. Rate offers change constantly, so confirm current figures with your lender before committing.
Frequently asked questions
Is mortgage interest compounded monthly in Canada?
Most closed Canadian mortgages compound semi-annually rather than monthly, and the quoted rate is usually a nominal annual rate. The effective annual cost is therefore slightly higher than the advertised figure. Ask your lender how it compounds and how the rate is shown in your mortgage documents.
How does mortgage interest affect my monthly payment?
Each payment covers interest first and principal second. A higher rate means more of every payment goes to interest, so the balance falls more slowly unless you increase the payment or make prepayments. A mortgage payment calculator shows how that split shifts across different rates.
Does the Bank of Canada set my mortgage interest rate?
No. The Bank of Canada sets the policy interest rate, which influences prime rate and short-term borrowing costs. Lenders then set their own prime rate and mortgage rates, while fixed rates track bond yields more closely. Your contract rate is the one you agreed to with your lender.
Sources
Related terms
- Prime Rate — The prime rate is the interest rate Canadian banks charge their most creditworthy borrowers, and it is the benchmark used to price variable-rate mortgages and lines of credit.
- Semi-Annual Compounding — Semi-annual compounding is the Canadian convention in which a mortgage rate quoted as an annual percentage is compounded twice a year rather than monthly or daily.
- Effective Interest Rate — The rate you actually pay once compounding is applied — always equal to or higher than the quoted nominal rate.
- Fixed-Rate Mortgage — A fixed-rate mortgage keeps the same interest rate and the same scheduled payment for the entire mortgage term, so each payment is known in advance.
- Amortization Schedule — An amortization schedule is a table showing how each mortgage payment splits between interest and principal over the life of the loan.