How Mortgage Amortization Actually Works
The first time most people look at a mortgage statement closely, they get an unpleasant surprise. You've been paying $2,160 a month for a full year — nearly $26,000 — and the balance has dropped by about $5,700. Where did the rest go?
The answer is amortization, and once you understand the mechanics, a lot of mortgage advice that sounds like folk wisdom suddenly makes arithmetic sense. This guide walks through exactly how the number is built, using a real example you can reproduce.
The short version
- Your payment is fixed, but its split between interest and principal changes every single month.
- Interest is charged on what you currently owe — so early payments, when the balance is largest, are mostly interest.
- On a 25-year mortgage at 6.5%, you don't cross the halfway point (where more of your payment goes to principal than interest) until year 15 — well past the midpoint of the loan.
- Extra payments are powerful precisely because they skip the interest on that amount for every remaining month.
The formula, and what each piece does
Every fixed-rate mortgage payment comes from one equation:
M = P × r ÷ (1 − (1 + r)−n)
Where M is the monthly payment, P is the principal (what you borrowed), r is the monthly interest rate (annual rate ÷ 12), and n is the total number of payments (years × 12).
You don't need to compute this by hand — that's what the calculator is for — but the shape of it matters. Notice that n sits in an exponent. That's why stretching a mortgage from 25 to 30 years lowers the payment by less than you'd expect while raising total interest by much more than you'd expect. The relationship isn't linear.
Our worked example
A $400,000 home, $80,000 down (20%), so a $320,000 mortgage at 6.5% over 25 years. That produces a monthly principal-and-interest payment of $2,160.66. Total paid over the full term: $648,198 — of which $328,198 is interest. You pay slightly more in interest than the house's mortgage itself.
Watching the split change
Here's what actually happens inside that $2,160.66 payment. In month one, you owe the full $320,000. One month's interest on that is $320,000 × (6.5% ÷ 12) = $1,733. So of your first payment, $1,733 is interest and only $427 reduces what you owe.
Next month you owe $319,573, so the interest charge is fractionally smaller — $1,730 — and $430 goes to principal. The payment never changes, but the balance it's charged against keeps shrinking, so the principal portion grows a little every month. Slowly at first, then faster.
| Year | Principal paid that year | Interest paid that year | Balance at year end |
|---|---|---|---|
| 1 | $5,284 | $20,644 | $314,716 |
| 5 | $6,848 | $19,080 | $289,799 |
| 10 | $9,469 | $16,459 | $248,036 |
| 15 | $13,094 | $12,834 | $190,286 |
| 20 | $18,106 | $7,822 | $110,429 |
| 25 | $25,038 | $890 | $0 |
Read the middle two columns against each other. In year 1 you're paying almost four dollars of interest for every dollar of principal. The crossover — the first year where principal exceeds interest — doesn't arrive until year 15. And look at the balance column: after ten years of payments totalling nearly $260,000, you still owe $248,036 of the original $320,000. By the final year, interest is almost nothing and you're paying down the house at over $25,000 a year.
This is why the phrase "I've been paying my mortgage for five years and barely made a dent" is so common, and why it isn't a sign you're doing anything wrong. It's the arithmetic working exactly as designed.
See this for your own numbers. The mortgage calculator generates the full year-by-year schedule for any price, rate and term.
Open the calculatorCanada vs. the US: the compounding difference
One detail trips up cross-border comparisons. In the United States, fixed-rate mortgages conventionally compound monthly. In Canada, fixed-rate mortgages are legally required to compound semi-annually, not in advance.
Practically, this means a Canadian mortgage quoted at 6.5% has a slightly lower effective monthly rate than an American one quoted at 6.5%. The payment difference on a $320,000 mortgage is roughly $15–20 a month — small, but real. Our calculator uses monthly compounding, so Canadian borrowers should treat its output as a slightly conservative estimate and confirm the exact figure with their lender.
Variable-rate mortgages, in both countries, work differently again: the rate moves with the lender's prime rate, and depending on the product, either your payment changes or your payment stays fixed while the principal/interest split shifts underneath it.
What actually reduces total interest
1. A shorter amortization
This is the single biggest lever. Same $320,000 at 6.5%:
| Amortization | Monthly payment | Total interest |
|---|---|---|
| 30 years | $2,023 | $408,142 |
| 25 years | $2,161 | $328,199 |
| 20 years | $2,386 | $252,600 |
| 15 years | $2,788 | $181,758 |
Going from 30 years to 20 costs you $363 more a month and saves you $155,542. That's the trade in its starkest form. The catch is that the higher payment is a commitment — if your income is uncertain, a longer amortization with voluntary extra payments gives you the same benefit with an escape hatch.
2. Prepayments, and why timing matters
Every extra dollar you put against principal removes that dollar from every future interest calculation. A single $10,000 lump sum in year 2 of our example saves roughly $32,200 in interest over the life of the loan and shortens it by 19 months. The same $10,000 applied in year 20 saves only about $3,600 — the money simply has fewer remaining months to compound against. Early prepayments are worth close to ten times what late ones are.
Most mortgages allow annual prepayments of 10–20% of the original principal without penalty, plus the option to increase your regular payment. Both go 100% to principal. Check your specific terms before making a large payment, as exceeding the allowance triggers a penalty that can wipe out the savings.
3. Accelerated bi-weekly payments
This one sounds like a gimmick and isn't. With accelerated bi-weekly, you take your monthly payment, halve it, and pay that every two weeks. Because there are 26 two-week periods in a year, you make the equivalent of 13 monthly payments instead of 12 — one extra payment a year, applied entirely to principal, without it ever feeling like a separate expense.
On our example mortgage, this alone cuts about 4.2 years off the amortization and saves roughly $64,500 — from one extra payment a year. Be careful to choose "accelerated bi-weekly" and not plain "bi-weekly" — the latter just splits the same annual total into 26 pieces and saves you almost nothing.
4. The rate itself
Shopping the rate is worth real money and takes an afternoon. Dropping from 6.5% to 6.25% on $320,000 over 25 years saves about $14,900 — for one conversation. A mortgage broker can often access rates a fraction below what a branch will offer you directly, and existing customers are rarely given a lender's best rate unless they ask.
What lenders are checking
Two ratios decide how much you can borrow, and they're worth knowing before you shop:
- Gross Debt Service (GDS): housing costs — mortgage payment, property tax, heating, and half of any condo fees — as a share of gross monthly income. Lenders generally want this under 32–39%.
- Total Debt Service (TDS): all of the above plus car loans, credit card minimums, student loans and lines of credit. Typically capped around 40–44%.
In Canada, borrowers must also qualify at a stress test rate — the higher of the Bank of Canada's benchmark qualifying rate or your contract rate plus 2%. You must prove you could still afford payments at that higher rate, which meaningfully reduces the maximum mortgage you'll be approved for. Paying off a car loan before applying frees up TDS room and can increase your approval by more than most people expect.
The mistakes that cost the most
- Budgeting for the payment instead of the cost of ownership. Property tax, insurance, utilities, and maintenance (budget roughly 1% of the home's value annually) are not optional. Our calculator includes tax and insurance for this reason.
- Treating the maximum approval as a target. Lenders approve based on ratios, not on your life. Approval for $600,000 is not advice to spend $600,000.
- Ignoring the renewal. In Canada, your term (often 5 years) is much shorter than your amortization (often 25). At renewal you get whatever rates exist then. Someone who took 2% in 2021 and renewed in 2026 saw their payment jump substantially — a scenario worth modelling before you buy.
- Refinancing without counting the reset. Refinancing into a fresh 25-year amortization after 7 years of payments lowers your monthly cost but restarts the interest-heavy portion of the schedule.