Why does my Canadian mortgage interest change every month even though my rate is fixed?

Most Canadian mortgages calculate interest daily. Each payment reflects the exact number of days since your last payment.

Your May payment covers April: 30 days. Your June payment covers May: 31 days. Your July payment covers June: 30 days.

That extra day in May creates extra interest. On a mortgage this size, roughly $40. Since your total payment does not change, that $40 comes out of principal instead. Which is why June shows less going to principal even though nothing else moved.

Shorter months push more toward principal. Longer months pull more toward interest. February is usually your best month for principal reduction, not because of a better rate, just fewer days. Over a full year it balances out exactly. Month to month it looks uneven.

Nothing is wrong with your mortgage.

Now for the layer underneath.

Under the Interest Act, fixed-rate mortgages in Canada must use a compounding frequency of no more than twice per year. In practice, every lender uses semi-annual compounding. This is one of the most significant structural differences between Canadian and American mortgages. In the US, mortgages compound monthly. In Canada, twice a year.

When a Canadian lender advertises a 4% mortgage rate, they do not mean 4% divided by 12 each month. They mean a rate that compounds semi-annually, which produces a slightly higher true annual cost.

If you have a variable-rate mortgage, the compounding question is less relevant than understanding what type of variable you actually have. These two products behave very differently when rates move.

An ARM, or Adjustable Rate Mortgage, changes your payment directly when the prime rate changes. Rates go down, your payment drops. Rates go up, your payment increases. Your amortization stays on track throughout.

This is the transparent version of variable. What you see is what you get. When the Bank of Canada cuts, you feel it immediately in your monthly payment.

A VRM, or Variable Rate Mortgage, looks calmer. Your payment stays fixed. But inside that payment, things shift constantly. When rates fall, more goes to principal. When rates rise, more goes to interest.

At first this feels like a good deal. Stable payment, variable rate.

The problem appears when rates rise far enough to hit your trigger rate — the point where your fixed payment no longer covers the interest being charged.

If you are comparing lenders and one of them highlights semi-annual compounding as a differentiator, disregard it. They all use it. Focus on what actually changes your cost:

• The contract rate. A 5 to 15 basis point difference here will swamp anything else on this list.
• Whether the variable product is ARM or VRM. This determines how your payment behaves every single month if rates move.
• Prepayment flexibility. Lump-sum limits, annual increase privileges, and double-up options. Cheaper to fix before signing than after.
• The penalty structure. Specifically whether IRD is calculated on posted rates or contract rates. On a mid-size mortgage that is often a five-figure difference.

Most people compare the headline rate and stop. That is incomplete. A slightly higher rate with better terms — more prepayment room, lower exit costs — can easily cost less overall than the lowest-rate option on the sheet.