The Interest Act's two mortgage rules: compounding disclosure and the five-year prepayment right, explained

Our Cost of Borrowing (Banks) Regulations explainer covers a modern, 2001-era federal disclosure timeline for a bank mortgage. This page covers something older and structurally different: two specific sections of the federal Interest Act (R.S.C. 1985, c. I-15) — a statute that predates Confederation-era banking law — that still directly shape how a Canadian mortgage is priced and how it can be paid off early.

Section 6: why Canadian fixed-rate mortgages are quoted with semi-annual compounding

Section 6 of the Interest Act applies to a mortgage on real property (and, as extended to Quebec by a later federal harmonization amendment, a hypothec on an immovable) that is repayable under a sinking-fund plan, by blended payments of principal and interest, or on any plan involving an allowance of interest on stipulated repayments — in practice, the way almost every conventional mortgage payment is actually structured. A mortgage of that kind has to contain a statement showing the principal amount and the interest rate chargeable on it, calculated yearly or half-yearly, not in advance. Rather than test that requirement against every possible compounding schedule, Canadian lenders quote fixed-rate mortgages using semi-annual (or annual) compounding as a matter of standard market practice specifically to stay inside what Section 6 requires — the reason a Canadian fixed-rate mortgage's posted rate and its true, monthly-pay effective rate aren't quite the same number, unlike a typical US mortgage quoted with monthly compounding from the start.

What happens if the required statement is missing

Section 6 doesn't just require the disclosure — it attaches a real consequence for skipping it: where a mortgage of the kind the section covers doesn't contain the required statement, no interest whatever is chargeable, payable, or recoverable on the principal money it covers until the deficiency is corrected — a complete forfeiture of interest, not merely a capped rate. That's a different, harsher remedy than Section 4's separate general disclosure default (which caps uncharged-rate interest at 5% per annum instead) — Section 4 by its own terms doesn't apply to a mortgage on real property in the first place, so the two provisions cover different situations with different penalties, not the same rule stated twice. Courts have narrowed exactly when Section 6's forfeiture actually bites in practice, which is itself a reason a specific compounding or disclosure dispute is worth raising with a lawyer rather than assumed to resolve one way or the other from this page alone.

A quirk of the rule: variable-rate mortgages aren't bound by it the same way

Because Section 6's trigger is tied to a plan with a stipulated, calculable interest rate over the relevant period, a variable-rate mortgage — where the rate itself moves with a benchmark rather than being fixed and stipulated — isn't held to the same semi-annual-compounding market practice, and lender compounding practice on a variable-rate product can and does vary, including some lenders compounding monthly. A borrower comparing a fixed-rate quote to a variable-rate quote is worth checking the stated compounding period on each rather than assuming they match.

Section 10: the right to prepay after five years, for a capped penalty

A separate section of the same Act, Section 10, gives a natural person (not a corporation, and not certain other non-individual borrowers) who has given a mortgage with an original term longer than five years the right to prepay the full remaining balance any time after the first five years have passed, on paying the outstanding principal plus a penalty capped at three months' interest — regardless of what the mortgage contract itself says about prepayment. A lender can't contract around this floor for an individual borrower; it can, however, offer more generous prepayment terms than the statutory minimum, and often does.

Why Section 10 matters for how mortgages are actually sold in Canada

Section 10's five-year cap is part of why a term longer than five years is comparatively uncommon in the Canadian market — a lender pricing a 7- or 10-year fixed-rate mortgage has to accept that a borrower can walk away after year five for a three-month interest penalty, capping how much long-term rate risk the lender can actually price into that longer term. It doesn't apply to a mortgage with an original term of five years or less at all (there's no early-payment floor being overridden, since the term simply runs its course), and it doesn't apply to a corporate borrower, who is free to negotiate whatever prepayment terms a lender will actually offer.

What this page is, and isn't: an explanation of two specific, real federal statutory provisions, for general understanding — not legal advice on how either section applies to a specific mortgage contract, and not a comparison of specific lenders' rates or prepayment terms. We do not name, rank, vet, or imply any verdict about a specific Canadian broker, originator, or brokerage on this or any Library page, and our published standard and Register remain United States-only.

What to actually check

If you're comparing a fixed-rate quote to a variable-rate quote, ask each lender directly what compounding period the quoted rate actually uses before treating the two numbers as apples-to-apples. If you're considering a mortgage with a term longer than five years, ask specifically what happens if you want to pay it off after year five — a lender's own prepayment schedule should say so, and Section 10's three-month-interest cap is the statutory floor under whatever the contract states, for an individual borrower.