Because the quoted rate is not the whole instruction. How often it compounds, and what the year is divided by, both change the payment. Most calculators pick one convention and never tell you which. This one makes you choose, then shows the periodic rate it derived so you can check the arithmetic yourself.
A quoted rate of 5% is an annual headline. To turn it into a payment, a lender has to say how often that 5% is applied, and what it divides the year by to get one period's worth. Those two decisions are the convention, and they are usually buried in the loan contract rather than printed next to the rate.
Canada quotes rates compounded semi-annually. The US quotes a nominal annual rate compounded monthly. Australia, New Zealand, the UK and South Africa accrue interest daily on a 365-day year and charge it monthly. Commercial lending often uses actual/360, which divides by 360 while still counting real days.
The gaps are small per payment and large over a term. That is the shape of most compounding effects, and it is why the convention is worth knowing about even though it never appears in an advertisement.
Semi-annual, and this surprises people. Compounding less often is cheaper for the borrower, because interest spends less time earning interest on itself. The word "semi-annual" sounds heavier than "monthly" and the arithmetic runs the other way.
At 5% quoted, semi-annual compounding gives an effective annual rate of 5.0625%. Monthly compounding gives 5.1162%. The Canadian convention is the cheaper one, by about half a tenth of a percentage point.
On $500,000 over 25 years that difference is $2,908.02 a month under the Canadian convention against $2,922.95 under the US one. Just under $15 a month. Across the full term it comes to roughly $4,478.
Stretch the same loan to 30 years and the monthly gap grows to about $15.65, totalling roughly $5,636. The gap widens with term, because a longer schedule gives the higher effective rate more room to work. It widens as rates rise, too.
No, and this is worth stating plainly because it is the part most people expect to go the other way.
Daily accrual on a 365-day year, charged monthly, works out to the annual rate divided by 365 and multiplied by the average month of 30.4167 days. That is the annual rate divided by twelve. Identical to the US monthly nominal figure, not approximately equal to it.
So an Australian daily-accrual loan and an American monthly-compounded loan at the same quoted rate have the same scheduled repayment. What differs is what happens between payments. Under daily accrual an extra repayment starts saving interest the day it lands. Under monthly compounding it does nothing until the next period boundary, and this is precisely why offset accounts work in Australia and have no clean American equivalent.
Actual/360 is the one that genuinely costs more. Dividing by 360 while counting 365 real days multiplies the annual interest by 365/360, about 1.4% more interest than the quoted rate implies. It looks identical on a rate sheet, which is part of why it persists in commercial lending.
Mostly not, and the distinction between law and convention gets muddled constantly.
India is the clearest case. The Reserve Bank of India directs that interest be charged on all advances at monthly rests, with a carve-out for agricultural lending.5 That is a rule about the method itself.
Australia is a partial case, and the detail matters. The National Credit Code fixes a 365-day divisor, but only for the statutory cap on what a lender may charge.4 It does not dictate what a lender actually does charge. Those are separate things, and conflating them is a common error.
Everywhere else, regulation governs what must be told to the borrower rather than how the interest is computed. The US Regulation Z governs the APR. The UK's FCA rules govern the APRC. Germany requires an effective annual rate, with the duty sitting in the Civil Code and the calculation method in the price disclosure regulation.6
Search for this and you will read that Canada mandates semi-annual compounding. It does not.
Section 6 of the Interest Act is a disclosure rule. It requires that a mortgage with blended payments state the principal and the rate "calculated yearly or half-yearly, not in advance", and the penalty for omitting that statement is severe: no interest at all becomes chargeable, payable or recoverable.1 Nothing in it requires semi-annual compounding. What it requires is that the rate be expressed on a yearly or half-yearly basis.
Semi-annual compounding is the market convention that grew up around the disclosure rule. Lenders converged on it because it is the safest way to satisfy the wording. The convention is real and near-universal for Canadian fixed-rate mortgages. It is simply not a mandate.
There is a further wrinkle. In 1967 the Supreme Court of Canada held that "blended" means mixed so as to be inseparable, and that quarterly instalments with a clearly stated rate were not blended because a simple arithmetic calculation could separate interest from principal.2 Read that way, section 6 may not apply to ordinary amortised mortgages at all. Lenders comply regardless, because the consequence of being wrong is losing all interest on the loan. The Uniform Law Conference of Canada recommended repealing the section in 2008.3 It is still on the books.
One practical note for Canadian readers: the semi-annual convention applies to fixed-rate mortgages. Variable-rate mortgages there are commonly compounded monthly, so a variable loan behaves like the US column in the table above.
Primary legal sources unless noted. Verified August 2026. Payment figures on this page were recomputed from the amortisation formula rather than carried over from secondary sources.