Mortgage math

Principal

The amount you actually borrowed. Each payment is split between principal (which reduces your balance) and interest. Early years are mostly interest; late years are mostly principal.

Every mortgage payment does two jobs: pay the interest owed for the period and chip away at the principal. Because interest is charged on the outstanding balance, early payments are mostly interest and later ones are mostly principal — the curve flips over the amortization.

Paying down principal builds equity directly, dollar for dollar. That's why lump-sum prepayments are so powerful early in the term: every extra dollar of principal removes all the future interest that dollar would have generated.

Your remaining principal is what a prepayment penalty (and the balance you renew or refinance) is calculated on — so watching it fall is watching your real ownership grow.

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Amortization

The length of time over which your mortgage is fully paid off. Canadian conventional limits: 25 years for insured, up to 30 for uninsured (or 30 for first-time buyers on new construction). Longer amortization = lower payment but more lifetime interest.

Equity

The difference between your home's current value and your remaining mortgage balance. Equity is what you can borrow against (HELOC, refinance) or what you keep when you sell.

LTV

Loan-to-Value ratio

Your loan amount divided by the property value. 80% LTV = 20% down. Maximum LTV on insured purchases is 95% on first $500K, 90% above.

Monthly payment

Principal + interest payable each month, calculated using Canadian semi-annual compounding. Insured files can switch to bi-weekly accelerated payments to shave years off the mortgage.

Semi-annual compounding

The Canadian standard for fixed-rate mortgages: interest is calculated on a semi-annual basis and applied to the daily balance. Makes Canadian rates look slightly higher than the US equivalent on a monthly-compounding basis.

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