Definition
The Interest Act is an old (1906) but still applicable federal law containing important provisions for mortgage borrowers:
**Section 6 — Annual rate disclosure**: any interest rate in a mortgage contract must be expressed as an effective annual rate (or equivalent). A lender that only expresses a monthly rate without providing the annual equivalent can only claim a default legal rate of 5%.
**Section 8 — Penalty restriction after 5 years**: for mortgages of 5 years or more on residential properties of fewer than 5 units, after 5 years have expired, the borrower may repay in full with a maximum penalty of 3 months' interest (regardless of the contractual penalty). This provision is little known but powerful — it allows breaking a long mortgage at lower cost after 5 years.
**Section 10 — Compound interest**: Canadian mortgage interest is calculated semi-annually rather than annually — which is why the real rate slightly differs from the posted rate.