Laboratory tests demonstrated that biochar filler added to Portland cement stabilized peat results in an increase of unconfined compressive strength, comparable with that of a sand filler. Strength increase is significantly higher when biochar is ground to a size below 75 µm. This paper investigates the changes in mineralogy, texture and microstructure during the early hydration of cement mixed with peat and biochar filler to identify the mechanisms responsible for the strength increase. The results show that the surface of biochar catalyzes nucleation of hydration products. Labile Carbon in biochar promotes carbonation, with precipitation of calcite in its cells and surface, as well as formation of Hemi and Monocarboaluminate, two stable Afm phases. For the larger fragments of biochar, the early hydration products do not reach the inner cells. Instead, the fine fragments tend to be fully covered leading to a more homogeneous spatial distribution of cement and voids.