A renewal is one of the few moments in a rental's life when a single decision moves its cash flow for years. It's also when many landlords discover their spreadsheet has been calculating interest the American way. This guide covers how Canadian mortgage interest is calculated, why only part of each payment is deductible, and how to prepare so you can compare offers instead of signing whatever arrives in the mail.
Why Canadian fixed-rate mortgages compound semi-annually
Section 6 of the federal Interest Act says that for mortgages repaid with blended payments of principal and interest, interest isn't recoverable unless the mortgage states the rate calculated yearly or half-yearly, not in advance. In practice, Canadian fixed-rate residential mortgages quote a rate compounded semi-annually. Variable-rate products are often calculated differently, so read your own mortgage documents rather than assuming.
Most online calculators, and most spreadsheet templates, divide the annual rate by 12 and compound monthly. For a Canadian fixed-rate mortgage that slightly overstates interest and payment.
The calculation, simply
To get the monthly rate from a semi-annually compounded annual rate, take half the annual rate, add 1, raise it to the power of one-sixth (because there are six months in each half-year), and subtract 1. In formula terms: monthly rate = (1 + annual rate ÷ 2)^(1/6) − 1.
Here is an illustrative example: a $420,000 balance at 4.49% with 25 years of amortization remaining and monthly payments.
| Semi-annual compounding (Canadian) | Monthly compounding (rate ÷ 12) | |
|---|---|---|
| Monthly rate | 0.3707% | 0.3742% |
| Effective annual rate | 4.54% | 4.59% |
| Monthly payment | $2,322.25 | $2,332.11 |
A difference of about $10 a month looks small, but if your records are built on the wrong formula, the interest you report and the balance you think you owe both drift from the lender's numbers. When the lender's annual statement doesn't match your spreadsheet, the compounding method is the first thing to check.
Principal vs interest: only one is deductible
CRA allows you to deduct interest on money borrowed to buy or improve a rental property. Repayments of principal are not deductible. Every blended payment contains both, and the mix shifts over time: early in the amortization, most of the payment is interest.
| Same example, 4.49% | Interest | Principal |
|---|---|---|
| First monthly payment | $1,557.00 | $765.25 |
| First 12 payments | about $18,494 | about $9,373 |
| Balance after 12 payments | about $410,627 |
On the T776, deductible mortgage interest goes on line 8710, Interest and bank charges. If you refinanced and used part of the money for something other than the rental, the interest on that part may not be deductible. Fees to get a mortgage (application, appraisal, legal and similar) are deducted over five years under CRA's rules, whatever the length of the term.
How much a rate change moves the payment
Continuing the example: after five years of payments, the balance is about $368,684 with 20 years of amortization left. Here is what that balance costs at different renewal rates, all compounded semi-annually.
| Renewal rate | Monthly payment | Interest in the first year |
|---|---|---|
| 3.99% | $2,225.85 | about $14,367 |
| 4.49% | $2,322.25 | about $16,164 |
| 4.99% | $2,420.72 | about $17,960 |
| 5.49% | $2,521.21 | about $19,754 |
Each half-point is roughly $100 a month on this balance. Compare that with the rent roll: if a half-point increase eats the margin on a unit, you want to know four months before renewal, not four days.
A renewal timeline
| When | What to do |
|---|---|
| About 4 months before | Pull the current balance, rate, term end date and prepayment terms. Update the rent roll and the year-to-date operating statement. |
| About 3 months before | Talk to your lender and at least one broker or other lender. Ask what documents they need for a rental property. |
| 2 to 3 months before | Compare offers on rate, term, prepayment privileges and penalties, and the cost of switching. |
| At least 21 days before | Federally regulated lenders must send a renewal statement at least 21 days before the term ends, showing the balance, rate, payment frequency, term and fees. |
| Before the term ends | Sign, or make sure the switch is complete. If your lender plans to renew automatically, the renewal statement says so. |
The Financial Consumer Agency of Canada recommends starting a few months before the end of the term rather than waiting for the renewal letter. Switching lenders can involve discharge, registration, appraisal and legal costs; ask whether the new lender will cover some of them.
Look beyond the rate
For a rental, the terms around the rate can matter as much as the rate itself. Compare prepayment privileges (how much extra you can pay each year without penalty), how the penalty for breaking the mortgage is calculated, whether the mortgage is portable to another property, and whether it's registered as a standard or collateral charge. If you might sell or refinance during the term, a slightly higher rate with a smaller break penalty can be the cheaper choice.
What to have ready for a rental renewal
- A current rent roll: each unit, tenant, rent, lease dates, deposits and vacancies, as of a recent date. Our rent roll guide covers what lenders look for.
- The last two years of rental statements or T776s, and a year-to-date operating statement.
- The current mortgage statement, property tax bill and insurance declaration.
- Copies of leases, or at least a sample lease and a list of lease terms.
- For subsidized units, the agreement with the housing agency.
Keeping it current between renewals
Propvara's mortgage tracking calculates payments with Canadian semi-annual compounding and records interest and principal on each payment, so deductible interest flows into the operating statement. Mortgages are visible only to owners, never to property managers or tenants. The rent roll and statements a lender asks for are a click away; an automatic renewal reminder with a lender pack is coming soon.
Sources
This article is general information for Canadian landlords and managers, not legal, tax or financial advice. Rules vary by province and change over time.