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Semi-annual compounding is the calculation method Canadian law requires for fixed-rate mortgages: interest is compounded twice a year, not in advance, even though payments are typically made monthly, bi-weekly, or weekly.
Section 6 of the federal Interest Act requires that, unless the mortgage is a variable-rate product, interest on a mortgage of real property be expressed as compounded semi-annually, not in advance. This is a legal disclosure and calculation convention, separate from how often the borrower actually makes payments.
Because compounding happens less frequently under this convention, the effective annual cost of a given nominal interest rate is slightly lower than the same nominal rate compounded monthly, which is the more common convention in other markets. This is also why lenders disclose both the nominal rate and its APR alongside the compounding frequency.
Legal requirement: Interest Act section 6 sets the semi-annual, not-in-advance compounding convention for fixed-rate mortgages on Canadian real property.
Fixed vs. variable: this convention applies to fixed-rate mortgages; variable-rate products are conventionally compounded monthly instead.
Cross-border comparisons are misleading: comparing a Canadian mortgage rate directly to a rate quoted in a market that compounds monthly, without adjusting for the compounding convention, understates the Canadian rate's relative cost.
Disclosed in the contract: lenders are required to disclose the compounding frequency alongside the nominal interest rate in mortgage documentation.
Definitions reflect Canadian federal and provincial rules as of the “Updated” date above. Not advice for any specific file.
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