Compound Interest
Compound interest means interest is calculated not only on the principal, but also on interest that has already been added to the balance. Over time, compounding can increase the total cost of borrowing compared to simple interest.
In Canadian mortgages, interest is commonly compounded semi-annually (even if payments are monthly). The exact impact depends on the rate, the compounding frequency, and how long the balance remains unpaid.
Why this matters:
Small differences in rate and time can produce big differences in total interest. Understanding compounding helps borrowers see the value of extra payments, shorter amortization, and avoiding unnecessary debt.
Related Mortgage Terms
Often confused with:
Interest Rate — The rate is the percentage; compounding describes how interest accumulates over time.
Closely related:
Amortization — Shows how payments split between interest and principal.
Amortization Period — Time is a major driver of total interest.
Next step:
Amortization — See how interest and principal change throughout the mortgage timeline.