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How mortgage amortization works

See why a loan balance shrinks gradually, how amortization differs from the term, and what a longer repayment period changes.

Published by Beaver Ledger · Edited

Fixed-payment teaching example; actual Canadian mortgage compounding and contract terms must be used for a quote.

Amortization is the planned process of paying a loan down over time. Early in a level-payment schedule, the larger outstanding balance generates more interest, leaving less of each payment to reduce principal. As the balance falls, that split changes.

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Example: watch two payments

Use a deliberately simplified loan with $100,000 outstanding, a monthly interest rate of 0.4% and a $600 monthly payment. The first month's interest is $400, leaving $200 for principal and a $99,800 balance. Next month, interest is $399.20, principal repayment is $200.80, and the balance becomes $99,599.20.

The 0.4% monthly rate is a teaching input, not a quoted Canadian nominal annual mortgage rate. The example isolates the payment split and ignores fees and rounding beyond cents.

Longer amortization trades payment size for time

Holding the same positive rate and principal constant, spreading repayment over more periods lowers the required regular payment but generally increases total interest if followed to completion. A lower payment does not by itself mean a cheaper loan.

Sources: FCAC — Choosing a mortgage

The term can end long before the loan

A five-year term and a twenty-five-year amortization describe different periods. The loan will normally still have a balance when that term ends. A new rate or agreement can change later payments and total cost, so a constant-rate lifetime interest figure is a scenario, not a forecast.

Sources: FCAC — Choosing a mortgage

How to compare responsibly

Run shorter and longer periods with the same starting balance and rate, then check whether the higher payment is manageable. If considering extra payments, read the prepayment limits and potential charges first.

  • Compare required payments and total modeled interest together.
  • Keep renewal-rate uncertainty separate from today's calculation.
  • Use the lender's amortization schedule to confirm contractual balances.

Sources: FCAC — Choosing a mortgage

Sources checked for this editorial revision on October 3, 2026. Educational content from Beaver Ledger; no professional review is claimed. Methods and limitations · Editorial practices and corrections.