Compound interest calculator
Set the compounding frequency deliberately — it is the input most calculators hide, and in Canada it is set by statute rather than preference.
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How does compound interest work?
Compound interest is calculated on the original amount plus all the interest already added, so the balance grows faster the longer it runs. The formula is A = P(1 + r/n)^(nt), where n is the number of compounding periods a year. That n matters more than most people expect: $10,000 at a nominal 5% for 10 years reaches $16,288.95 compounded annually, $16,386.16 compounded semi-annually and $16,470.09 compounded monthly. Canadian fixed-rate mortgages compound semi-annually because the Interest Act requires the rate to be stated calculated yearly or half-yearly, not in advance.
Compounding frequency is a legal matter in Canada, not a preference
Section 6 of the Interest Act says that where a mortgage on real property is repayable with blended payments of principal and interest, no interest is chargeable at all unless the mortgage states the principal and the rate "calculated yearly or half-yearly, not in advance".
That single clause is why Canadian fixed-rate mortgages are quoted on a semi-annual compounding basis while American ones compound monthly. It is not a banking custom that could change next year — it is a condition of the interest being recoverable at all.
The practical consequence: a 5% Canadian mortgage and a 5% American mortgage are not the same rate. The Canadian one has a lower effective annual rate, because compounding twice a year adds less than compounding twelve times.
The effective annual rate is the only fair comparison
A nominal rate is meaningless without its compounding frequency attached. 5% compounded monthly and 5% compounded annually are different amounts of money, and the quoted number is identical.
The effective annual rate collapses both into one comparable figure: what the rate actually costs or earns over a full year once compounding is accounted for. 5% compounded monthly is an effective 5.116%. 5% compounded semi-annually is an effective 5.0625%. 5% compounded annually is exactly 5%.
This calculator shows the effective annual rate on every result, so two quotes on different bases can be compared directly.
Contributions do the heavy lifting early on
There is a widespread belief that compounding is what builds a portfolio. Over the first decade that is simply not true — contributions dominate, and by a wide margin. Compounding only overtakes them well into the second decade at typical rates.
The practical implication is unglamorous but useful: in the early years, increasing what you put in moves the final number far more than chasing a slightly better rate. Later, the reverse becomes true, and the crossover point is worth knowing for your own numbers.
The breakdown below separates your contributions from the interest earned, so you can see which one is actually doing the work over your chosen term.
Where the money sits changes what you keep
This calculator projects gross growth. What reaches you depends on the account. Inside a TFSA, growth and withdrawals are not taxed. Inside an RRSP, growth is sheltered but every dollar withdrawn is taxed as income. In a non-registered account, interest is taxed annually at your full marginal rate, while capital gains and eligible dividends are taxed more favourably.
Interest income is the least tax-efficient of the three in a non-registered account, which is precisely why interest-bearing holdings are usually the first thing moved into registered room.
None of that is modelled here. Treat the figure as a pre-tax projection and apply your own account's treatment to it.
The formula
One expression for the lump sum, a second for the contribution stream.
lump sum: A = P × (1 + r/n)^(n × t)contributions: FV = C × [ (1 + i)^m − 1 ] ÷ ii = (1 + r/n)^(n/p) − 1 rate per contributionm = p × t number of contributionseffective annual rate: EAR = (1 + r/n)^n − 1P = starting amount r = nominal annual rate (as a decimal)n = compounding periods per year t = yearsC = contribution amount p = contributions per year
The middle step is the one most calculators skip. Contributions rarely land on a compounding date — you might contribute every two weeks against a rate that compounds semi-annually. Converting the nominal rate into an effective rate per contribution interval handles that properly, instead of pretending the two schedules line up.
Where contributions are made at the beginning of each period rather than the end, the whole future value is multiplied by one more period of growth, (1 + i). Over thirty years that timing choice alone is worth a noticeable amount.
Worked example: the compounding basis is worth real money
$25,000 at a nominal 6% for 20 years, with no contributions, compared across three compounding bases.
- Compounded annually — 25000 × 1.06^20$80,178.39
- Compounded semi-annually — 25000 × 1.03^40$81,550.94
- Compounded monthly — 25000 × 1.005^240$82,755.11
- Effective annual rate, semi-annual basis6.090%
- Effective annual rate, monthly basis6.168%
The same quoted 6% produces a $2,576.72 spread over 20 years depending only on how often it compounds.
On a mortgage the same effect runs in the borrower's favour: Canada's semi-annual convention means a 6% Canadian mortgage costs less than a 6% mortgage compounded monthly, before any other difference between the two.
Compounding frequency, from least to most favourable to a saver
- Annually — one period a year, the baseline where nominal and effective rates are identical
- Semi-annually — the Canadian mortgage convention, set by the Interest Act
- Quarterly — common on some GICs and business deposit accounts
- Monthly — the usual basis for savings accounts and most American lending
- Daily — used by some high-interest savings accounts; the gain over monthly is small
Terms on this page
- Nominal rate
- The rate as quoted, before accounting for how often it compounds. Meaningless on its own — always ask what basis it is quoted on.
- Effective annual rate (EAR)
- What a nominal rate actually works out to over a full year once compounding is included. The only figure that lets you compare two quotes on different bases.
- Not in advance
- The Interest Act's phrase meaning interest is charged at the end of each period on the balance actually outstanding, rather than deducted up front.
- Blended payment
- A payment combining principal and interest in one fixed amount — the standard structure for a Canadian mortgage, and the trigger for section 6 of the Interest Act.
Common questions
Why do Canadian mortgages compound semi-annually?
Because section 6 of the Interest Act requires a mortgage repayable in blended payments to state its rate calculated yearly or half-yearly, not in advance. Lenders use half-yearly, and the consequence is that a Canadian fixed mortgage has a lower effective annual rate than an American one at the same quoted rate.
What is the formula for compound interest?
A = P(1 + r/n)^(nt), where P is the starting amount, r is the nominal annual rate as a decimal, n is the number of compounding periods per year and t is the number of years. With regular contributions you add the future value of an annuity on top.
What is the difference between the nominal and effective rate?
The nominal rate is the number quoted. The effective annual rate is what it actually amounts to over a year once compounding is included. 5% compounded monthly has an effective rate of 5.116%; 5% compounded semi-annually is 5.0625%. Only effective rates can be compared like for like.
Does compounding daily beat compounding monthly?
Slightly, and by less than most people expect. At 5%, daily compounding gives an effective 5.127% against 5.116% for monthly — about $11 a year on $100,000. The compounding basis matters far more between annual and monthly than between monthly and daily.
Is compound interest taxed in Canada?
It depends on the account. Inside a TFSA it is not taxed at all. Inside an RRSP it grows tax-sheltered but is taxed as income on withdrawal. In a non-registered account, interest is taxed annually at your full marginal rate — the least favourable treatment of the common income types. This calculator projects pre-tax growth.
Where these numbers come from
- Interest Act (R.S.C., 1985, c. I-15), section 6 The statutory requirement that a blended-payment mortgage state its rate calculated yearly or half-yearly, not in advance.
- Financial Consumer Agency of Canada — Savings and investment accounts Plain-language guidance on how interest is credited and how registered accounts are treated.
Last verified 2026-08-01 The method on this page is checked against the sources above at least once a year. Spotted something out of date? Tell us and we will fix it.
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