Methodology

Semi-annual compounding

Canadian residential mortgages compound interest semi-annually by default under the federal Interest Act. That is not the same as dividing the annual rate by 12 (a common U.S.-style shortcut).

We convert a nominal annual contract rate r into an effective monthly rate like this:

Example: at 4.29% nominal, the semi-annual factor is 0.0429 ÷ 2 = 0.02145, and the sixth root of 1.02145 gives roughly 0.354% per month — slightly less than 4.29% ÷ 12.

Payment (annuity) formula

Once we have an effective monthly rate, the fixed payment that fully amortizes the loan is the standard annuity formula:

• M — fixed monthly payment
• P — principal (including any CMHC premium rolled into the mortgage)
• r — effective monthly rate
• n — number of monthly payments (e.g. 300 for 25 years)

Other payment frequencies (bi-weekly, accelerated, etc.) are derived from this monthly payment using standard Canadian conversion rules.

CMHC mortgage insurance

When your down payment is under 20% (loan-to-value above 80%), default insurance is generally required on high-ratio mortgages. The premium is a percentage of the mortgage amount and is typically added to the balance.

Premium tiers we use:

• Maximum insurable purchase price: $1,500,000
• Homes above that price need at least 20% down and are not high-ratio insured under these rules
• Insured amortization longer than 25 years (eligible first-time buyers / new builds only, where allowed) adds a +0.20 percentage point surcharge on the premium rate (e.g. 4.00% → 4.20%)

Mortgage stress test

Federally regulated lenders qualify you at a rate higher than your contract rate so you can still afford payments if rates rise. The qualifying rate is:

So if your contract rate is 4.29%, you qualify at max(6.29%, 5.25%) = 6.29%. If contract rates were very low, the 5.25% floor would apply instead. We use this same rule when showing stress-test payments and affordability.

GDS & TDS ratios

Lenders measure housing and total debt loads against gross income:

• GDS (Gross Debt Service) — mortgage payment + property tax + heating + applicable condo fees, divided by gross income. Guideline maximum: 39%
• TDS (Total Debt Service) — GDS housing costs plus other monthly debt payments (car loans, student loans, credit cards, etc.). Guideline maximum: 44%
• Condo / strata fees: we include 50% of monthly fees in housing costs (common underwriting practice)

Affordability tools also show more conservative advisory targets (32/37) so you have breathing room.

Land transfer tax (marginal brackets)

Provincial (and some municipal) land transfer taxes are calculated with marginal brackets — each portion of the purchase price is taxed at its own rate, not the top rate on the whole amount.

Example for Ontario provincial LTT (simplified): the first $55,000 at 0.5%, the next slice at 1%, and so on up to higher brackets on very expensive homes. First-time buyer rebates (where available) reduce the tax up to a provincial maximum; Toronto has an additional municipal tax and rebate.

Provinces without a provincial land transfer tax are shown as zero provincial LTT in our closing-cost estimates. Municipal fees, legal costs, and other closing items are separate estimates — see the Closing Costs calculator.

Prepayment penalty (IRD) estimate

Breaking a fixed-rate mortgage early usually costs the greater of three months' interest or an Interest Rate Differential (IRD). Variable-rate mortgages often use three months' interest only.

This is a standard industry-style estimate using the rates you enter. Big-bank IRD formulas can differ — some use posted rates, discounted “comparison” rates, or more complex present-value methods. Always get a written payout statement from your lender before breaking a mortgage.

Rent vs. buy — high-level assumptions

The rent-vs-buy tool projects year-by-year net worth for a buyer and a renter under the same cash-flow capacity. High-level ideas:

• Buyer — pays mortgage (semi-annual compounding), property tax, insurance, maintenance, and closing costs up front; builds equity as the home appreciates and the mortgage amortizes; pays selling costs at the end of the horizon
• Renter — pays rent (inflating annually) and invests the would-be down payment plus any cash-flow difference at an assumed portfolio return
• Growth rates (appreciation, rent inflation, investment return) are user inputs — not forecasts. Small changes can flip the winner
• Taxes on investment gains, principal-residence exemptions, and lifestyle differences are simplified or omitted

Use it for intuition, not as a guarantee of which path is “better.”