How Canadian Mortgages Work: CMHC, Compounding, Stress Test

A mortgage in Canada works differently from one in the United States or the United Kingdom, even when the quoted rate is the same. The interest compounds on a different schedule. A small down payment brings mandatory insurance. You have to pass a qualifying test at a rate higher than the one you'll actually pay. And the rate is fixed only for a "term" of a few years, not for the life of the loan.

This guide works through each of those rules using one purchase from start to finish, so you can see what each one does to the numbers.

The example we'll follow

A buyer in Ontario purchases a $650,000 home with $65,000 down (10%). They take a 5-year fixed rate of 4.29%, a 25-year amortization and pay monthly. All the figures below come from our Canada mortgage calculator with those inputs.

Why Canadian payments compound twice a year

Section 6 of the federal Interest Act says a mortgage with blended payments of principal and interest must state its rate "calculated yearly or half-yearly, not in advance". Lenders quote fixed rates on that basis, so a 4.29% fixed mortgage compounds semi-annually: 2.145% every six months.

Most payments are not made every six months, so the lender converts the rate to the matching rate per payment. For monthly payments that is (1 + 0.0429 ÷ 2)^2/12 − 1, about 0.3543% a month. A US-style mortgage at the same quoted 4.29% charges 0.3575% a month (4.29% ÷ 12).

The gap looks tiny but it adds up. In effective annual terms, 4.29% compounded semi-annually is 4.336%, while 4.29% compounded monthly is 4.375%. On our $603,135 mortgage the Canadian payment is $3,268.14 and the US-style payment would be $3,280.94, which is $12.80 a month or about $3,800 over 25 years.

Variable-rate mortgages are different. Many compound monthly, and the rate moves with the lender's prime rate. Check your mortgage agreement: it states how the rate is calculated, and that is the figure that counts. A calculator that ignores compounding, which most generic "mortgage calculators" do, will slightly overstate a Canadian fixed-rate payment.

The minimum down payment

The federal minimum depends on the purchase price, and it is charged in tiers like a tax bracket:

So a $450,000 home needs at least $22,500 down, and our $650,000 home needs $25,000 + $15,000 = $40,000, about 6.2%. An $800,000 home needs $55,000, about 6.9%. At $1.6 million the minimum jumps to $320,000, because a mortgage on a home of $1.5 million or more can't be insured, and an uninsured mortgage needs 20% down.

The $1.5 million line is recent. Until 14 December 2024 the cap for insured mortgages was $1 million, a limit that had stood since 2012. The Department of Finance raised it to $1.5 million from 15 December 2024. Older articles that say "$1 million" are out of date.

What mortgage insurance costs

With less than 20% down, the mortgage must be insured against default, by CMHC or a private insurer. The insurance protects the lender, not you, but you pay for it. The premium is a percentage of the loan, and it rises as the loan takes up more of the home's value (the loan-to-value ratio, or LTV):

Our buyer borrows $585,000 against $650,000, an LTV of exactly 90%, so the premium is 3.10%, or $18,135. That is normally added to the mortgage rather than paid up front, which means you pay interest on it for the whole amortization.

Two extras are easy to miss:

• Provincial sales tax on the premium. Ontario, Quebec and Saskatchewan charge it, it can't be added to the mortgage, and it's due in cash at closing. In Ontario that is 8% of the premium, or $1,450.80 in our example. Budget for it alongside the land transfer tax and legal fees.
• A surcharge for amortizations over 25 years. CMHC adds 0.20 percentage points to the premium when the amortization is longer than 25 years.

Is it worth stretching to 20% down to avoid the premium? In our example, putting $130,000 down instead of $65,000 gives a $520,000 mortgage at $2,817.67 a month, $450 less per month and about $52,000 less total interest. But it means saving an extra $65,000 first, while rent and house prices keep moving. The premium is the price of buying sooner. Whether it's worth paying is a personal decision, but you should know its size.

25 years or 30

The amortization is how long the mortgage would take to pay off at the current payment. For insured mortgages the maximum is 25 years, with one exception. Since 15 December 2024, first-time buyers and buyers of newly built homes can take 30 years. (From 1 August 2024 it had applied only to first-time buyers purchasing a new build.) With 20% or more down the mortgage is uninsured, and many lenders offer 30 years regardless.

Here's what 30 years does if our buyer is a first-time buyer. The premium rises to 3.30% because of the surcharge, so the mortgage becomes $604,305. The monthly payment drops to $2,973.58, about $295 less a month. Total interest, at a constant rate, rises from $377,307 to about $466,000.

The lower payment can be what gets you approved, and you can always pay faster later. Most mortgages let you raise the payment or make lump-sum prepayments up to a yearly limit. The risk is treating the 30-year payment as the plan rather than the floor.

Payment frequency and the accelerated trick

Canadian lenders offer several payment schedules, and two of them look almost identical but aren't:

• Bi-weekly spreads the same annual amount over 26 payments: $1,506.94 every two weeks in our example. That's $39,180 a year, slightly less than 12 monthly payments of $3,268.14 ($39,218), because paying earlier saves a little interest. The payoff date barely moves.
• Accelerated bi-weekly takes the monthly payment and halves it: $1,634.07 every two weeks. Twenty-six of those come to $42,486 a year, which equals 13 monthly payments instead of 12.

The extra month a year all goes to principal. In our example accelerated bi-weekly pays the mortgage off in about 21 years 9 months instead of 25 and saves about $55,600 in interest, if the rate stayed at 4.29% throughout. Accelerated weekly (a quarter of the monthly payment, 52 times a year) does almost exactly the same.

If your pay arrives every two weeks, accelerated bi-weekly is often the most painless way to prepay. Most lenders will switch you at no cost.

The stress test

To approve you, a federally regulated lender, which includes every major bank, must check that you could carry the mortgage at the minimum qualifying rate. That is the greater of your contract rate plus 2 percentage points or 5.25%. OSFI sets this rule for uninsured mortgages. The federal mortgage insurance rules apply the same benchmark to insured mortgages.

Our buyer's rate is 4.29%, so they qualify at 6.29%, and the lender assesses a payment of $3,963.47, about $695 more than they will actually pay. The test is about affordability on paper: the lender plugs that higher payment, plus property tax, heating and other debts, into its debt-service ratios against your income. You never pay the qualifying rate. It's a buffer in case rates are higher when you renew.

Two practical points. First, the floor matters only when rates are low: below a 3.25% contract rate, 5.25% is the bigger number. Second, since late 2024 you don't have to pass the test again when you switch an uninsured mortgage to another lender at renewal, as long as the amount and amortization don't increase. That makes it easier to shop around at renewal.

Term versus amortization

The most important difference from a US 30-year fixed is that a Canadian fixed rate is fixed only for the term, usually 1 to 5 years, with 5 the most common. At the end of the term you renew the remaining balance at whatever rate is on offer then.

After five years of payments our buyer still owes $527,673 of the $603,135. The interest paid in those five years is about $120,600, while only about $75,500 of the balance has been paid down. That's normal early in a mortgage, because interest is charged on a large balance. It also means a rate change at renewal acts on almost the whole loan. If the rate is 1 percentage point higher at renewal, the payment for the remaining 20 years rises by roughly $280 a month.

That's why "total interest over 25 years" on any calculator, ours included, is an estimate. It assumes today's rate holds for the full amortization, which it almost never does.

Before you sign

1. Check your down payment against the tiered minimum, not a flat 5%.
2. Add the insurance premium to the loan, and budget cash for the sales tax on it if you're in Ontario, Quebec or Saskatchewan.
3. Make sure you can carry the stress-test payment, not only the real one.
4. If you qualify for 30 years, compare the total interest against 25 before you choose.
5. Ask for accelerated bi-weekly payments, and for the prepayment limits in writing.
6. Estimate the payment at renewal if rates are 1 to 2 points higher.