Amortization Explained: How Your Payments Split Between Principal and Interest

What Is Amortization?

Amortization is the process of paying off your mortgage through scheduled payments over time. Your amortization period is the total time it would take to pay off the entire mortgage — commonly 25 years in Canada, though it can range from 5 to 30 years.

Why Early Payments Are Mostly Interest

Each payment covers interest on the outstanding balance plus a slice of principal. Because the balance is highest at the beginning, more of each payment goes to interest. As you pay down the principal, the interest portion shrinks and the principal portion grows.

Example: $500,000 mortgage at 5.5%, 25-year amortization. Monthly payment: ~$3,047.

Payment	Interest Portion	Principal Portion	Balance Remaining
#1	$2,263	$784	$499,216
#60 (Year 5)	$2,055	$992	$448,000
#120 (Year 10)	$1,810	$1,237	$390,000
#240 (Year 20)	$1,100	$1,947	$235,000
#300 (Year 25)	$13	$3,034	$0

Canadian Compounding Convention

In Canada, mortgages use semi-annual compounding — interest compounds twice per year, not monthly. This is mandated by the Interest Act. The effective monthly rate is calculated as: (1 + annual rate / 2)^(1/6) - 1.

This means Canadian mortgages are slightly cheaper than an equivalent US mortgage with monthly compounding at the same stated rate.

Amortization vs Mortgage Term

These are often confused:

• Amortization period: Total time to pay off the mortgage (e.g., 25 years)
• Mortgage term: How long your current rate contract lasts (e.g., 5 years)

After your term ends, you renew at new rates — but the amortization clock keeps running. You typically renew 4–5 times over a 25-year amortization.

How to Pay Off Your Mortgage Faster

• Accelerated bi-weekly payments: Make 26 half-monthly payments instead of 12 full payments. Effectively adds one extra monthly payment per year. Saves ~3 years on a 25-year mortgage.
• Annual lump-sum prepayments: Most mortgages allow 10–20% of original balance per year penalty-free. Each dollar goes directly to principal.
• Round up your payments: If your payment is $2,947, pay $3,200. The extra $253 hits principal directly.
• Shorten your amortization at renewal: If your income has grown, reduce from 20 years remaining to 15 years when you renew.

Use our payment calculator to see exactly how your payments split and model prepayment strategies.