Amortization

One word, two meanings

Amortization shows up in two very different places. The first, and the one most Canadians care about, is loan amortization: the gradual repayment of a debt through scheduled payments. The second is an accounting concept: writing off the cost of an intangible asset, like a patent or software, bit by bit over the years it will be useful.

The loan meaning dominates everyday life, especially for anyone with a mortgage, so that is where this article spends most of its time. The accounting meaning gets a short section at the end.

How loan amortization works

Every regular mortgage payment you make is quietly split in two. One part pays the interest that has built up on your outstanding balance since the last payment. The other part pays down the principal, the amount you actually borrowed. Because interest is always calculated on the remaining balance, the split changes with every single payment, even though the payment amount itself stays the same.

When the balance is large, at the start of the loan, the interest charge is large, so most of your payment goes to interest and only a small slice reduces the principal. As the balance shrinks, the interest charge shrinks with it, and a bigger and bigger share of the same payment goes to principal. The repayment accelerates on its own, like a snowball rolling downhill.

The total runway for this process is called the amortization period, typically 25 years for a Canadian mortgage. Do not confuse it with the mortgage term, which is your current contract with your lender, usually 5 years or less. Your rate is locked for the term; the amortization is the long game that spans several terms.

The amortization schedule: your loan in slow motion

An amortization schedule is a table that lists every payment over the life of the loan and shows exactly how each one splits between interest and principal, along with the balance left afterward. Most lenders will produce one on request, and any decent mortgage calculator can generate one in seconds.

Reading one for the first time is often a shock. On a $400,000 mortgage at 5% amortized over 25 years (as of July 2026), the monthly payment is about $2,326. Of the very first payment, roughly $1,650 goes to interest and only about $676 reduces the principal. You pay $2,326 and your debt drops by $676.

The good news is that the picture improves steadily. On that same mortgage, the split reaches 50/50 around year 11. By the time 5 years remain, the numbers have flipped: about $509 of each payment goes to interest and about $1,817 goes to principal. Same payment, opposite split.

This is also why prepayments early in the loan are so powerful. A lump sum in year 2 removes principal that would otherwise have generated interest for decades, while the same lump sum in year 23 saves relatively little.

Longer amortization: smaller payments, bigger total cost

Stretching the same loan over more years shrinks each payment, because the principal is divided into more pieces. But it also means the balance stays high for longer, and interest is charged on that balance the whole time. The result is a classic trade-off: a longer amortization buys monthly breathing room at the cost of more total interest.

On the $400,000 mortgage at 5%, moving from a 25-year to a 30-year amortization drops the payment from about $2,326 to about $2,133, a saving of $193 a month. The price of that saving is roughly $70,000 of extra interest over the life of the loan, on top of the roughly $298,000 of interest the 25-year version already costs.

Neither choice is automatically wrong. The longer amortization can be the difference between qualifying and not qualifying, or it can protect your cash flow while incomes are tight. The key is to choose it with the full price tag in view, and to remember you can shorten your effective amortization later with prepayments or higher payments.

The Canadian rules on amortization length

How long you can amortize depends mainly on your down payment. With less than 20% down, your mortgage must carry mortgage default insurance, and insured mortgages are normally capped at a 25-year amortization. Since December 2024, first-time buyers and buyers of newly built homes can qualify for insured mortgages with 30-year amortizations (as of July 2026).

With 20% or more down, the mortgage is uninsured and most lenders commonly offer amortizations up to 30 years. Some alternative lenders go longer still, though usually at higher rates.

Amortization in accounting: intangible assets

In accounting, amortization is the cousin of depreciation. Depreciation spreads the cost of a physical asset, like a delivery truck, over its useful life. Amortization does the same thing for intangible assets: patents, licences, trademarks, purchased software, customer lists.

The logic is matching. If a business pays $50,000 for a patent that will generate revenue for 10 years, expensing the whole $50,000 in year one would distort the picture. Instead, the business records $5,000 of amortization expense each year for 10 years, matching the cost to the revenue it helps produce.

You will meet this meaning on company financial statements, often bundled into the line "depreciation and amortization" (the "DA" in EBITDA). For most personal finance decisions, though, the loan meaning is the one that matters.