Principal
Capital in French
Quick definition
The principal is the amount actually borrowed or invested, as opposed to the interest it generates. On a loan, only the principal portion of each payment reduces what you owe; the rest is the cost of borrowing.
Principal vs. interest: the two parts of every payment
The principal is the money itself. Borrow $400,000 for a house and your principal is $400,000; everything you pay beyond that over the years is interest, the price of using someone else's money.
Every loan payment is split, and the order never changes: interest gets paid first, principal second. Each payment covers the interest accrued since the last one, and only the remainder chips away at the balance. Early in a mortgage the balance is large, so interest claims most of each payment; as the balance shrinks, the split shifts steadily toward principal. The full mechanics of that shift are covered in the amortization article.
Why prepayments punch above their weight
A regular payment is mostly interest in the early years, but a prepayment is 100% principal. It skips the interest queue entirely: an extra $10,000 comes straight off the balance, and every future payment then accrues less interest, so more of each of those payments hits principal too. That compounding-in-reverse is why a modest lump sum early in a mortgage can cut years off the schedule. Check your prepayment privilege to see how much you can prepay each year without penalty.
Principal in bonds and savings
The word shows up on the investing side too. In a bond, the principal (also called the face value) is the amount repaid in full at maturity; the coupons along the way are interest. In savings, principal is what you deposited, versus the growth that compound interest or markets add on top. A GIC guarantees your principal; a stock portfolio does not.
In Canada
Canadian mortgage statements show the interest and principal split of every payment, which makes the early-years imbalance easy to see for yourself. Most closed mortgages allow annual lump-sum prepayments of 10% to 20% of the original principal without penalty (as of July 2026). On the savings side, CDIC deposit insurance protects eligible deposits, principal and interest combined, up to $100,000 per insured category at member institutions (as of July 2026).
Worked example
Dan takes a $400,000 mortgage at 5% amortized over 25 years, a payment of about $2,326 per month (as of July 2026). His first payment includes roughly $1,650 of interest and only about $675 of principal. Twenty years in, the same $2,326 is mostly principal.
In year two he prepays $10,000 from a bonus. The entire amount comes off the principal, saving roughly $20,000 of interest over the remaining amortization and shortening it by close to a year, far more impact than $10,000 spread across regular payments would have had.
Related terms
Reviewed by Alexandre Bernier, CFP®, CIM®, PFP®·Updated July 2026