Differences Between American and Canadian Mortgage Calculation

As our tool Zilculator provides investment calculations not only to American, but also Canadian and other investors world-wide, we optimized it to include country-specific differences. In Canada, mortgages are by law compounded semi-annually as opposed to the monthly compounding in the US and in most other countries around the globe. The only exceptions to this are variable rate mortgages. This makes them a bit harder to grasp for an investor who wants to do their own calculations.

Let's use an example of a mortgage with 12% interest per annum (yearly) and a loan amount of $100,000.

In the USA, investors can simply divide this rate by 12 (months) and use a rate of 1% with monthly payments and compounding in their calculations. In the end of the first month borrower in the USA owns $1,000 for interest to the lender (12% 12 * $100, 000).

However, a Canadian investor pays $975.88 after the first month for the interest part of the mortgage. Now that's confusing, right? In Canada we have to differentiate the Nominal annual interest which is the one quoted from the bank, in our case 12% and the effective annual interest rate, which is in fact 12.36% based on 6% semi-annually. The payments are made monthly, and therefore we have to use a monthly effective rate converted from an annual rate. We find a rate that compounded monthly will result in the effective annual rate of 12.36%. Once we know this rate, we can calculate the rest of the mortgage payments the same way.

If you like the Math, here is the actual formula and calculation:

(1+r_M)¹²-1 = 0.0609

r_M = (1.0609)^1/12

r_M = 0.493862%

If you are not a fan of Math, we prepared an excel sample with the calculation, where you can input your numbers and play around. There is also a comparison with the calculation of American (monthly compounded) mortgage.

The good news is that if you use Zilculator and analyze your Canadian investment properties, simply select Semi-annual compounding in the Financing section of the property form (see the snapshot below), and the software takes care of the rest for you. You get the exact results you need!

Excel Spreadsheet Example

We prepared a simple example and calculation of a canadian mortgage with semi-annual compounding in an excel spreadsheet file. You can download the file, input your own numbers and calculate results in no time. The only thing we ask in return is for you to like our facebook page or follow us on twitter.