Ever wonder why your early mortgage payments in Canada seem to vanish into thin air? It’s not magic (although it might feel that way sometimes!). Most of your initial payments go towards interest, not principal. Here’s why that happens and how it shifts over time.
Understanding Amortization:
Canadian mortgages are typically “amortized,” meaning your payments are spread out over a set term (e.g., 25 years). Each payment covers two things: interest on the outstanding loan amount and a portion that goes toward paying down the principal (the actual borrowed amount).
Early Payments = More Interest:
Early on, the principal balance is high, so the interest charged on it is also high. This means a larger chunk of your payment goes towards interest, with a smaller amount chipping away at the principal.
Think of it like this: Imagine you owe $100,000 with a 5% interest rate. Your monthly interest payment would be around $417. If your total payment is $800, the remaining $383 goes towards the principal.
The Balance Shifts Over Time:
As you make more payments, the principal balance decreases. This lowers the interest amount charged, so a larger portion of your payment goes towards principal reduction. Over time, the balance between interest and principal paid gradually shifts, with more money going towards paying off the loan itself.
The Takeaway:
While it might feel discouraging to see most of your initial payments go towards interest, it’s important to remember that you’re still making progress on your loan. With consistent payments, the interest burden decreases, and you’ll see a larger portion going towards paying down the principal.
Bonus tip to pay your mortgage balance faster
When you select an accelerated weekly or bi-weekly payment option, you are essentially making the equivalent of one additional monthly payment each year which will help pay off your mortgage faster.
