Loan comparisons become clearer when principal, interest, term, and amortization are kept separate. Each answers a different question about the borrowing agreement.
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Compare two amortizations with the same borrowing assumptions
Consider a hypothetical $300,000 Canadian mortgage at a nominal annual 5%, compounded twice per year, with monthly payments, a five-year term and no extra payments. Run the calculator once at 20 years and again at 25 years; change only amortization. The effective monthly rate is (1.025)^(1/6) − 1. This is a fixed-rate illustration, not a lender quote.
| Amortization | Monthly payment | Balance after five years | Projected lifetime interest |
|---|---|---|---|
| 20 years | $1,971.38 | $250,135.20 | $173,130.02 |
| 25 years | $1,744.81 | $265,522.52 | $223,444.49 |
Interpret the trade-off and the renewal uncertainty
The 25-year option lowers the monthly payment by $226.56 but adds $50,314.47 of projected interest. The differences use unrounded calculations before rounding to cents; subtracting two already-rounded labels may differ by a cent. After five years it also leaves $15,387.32 more principal outstanding. A smaller payment can help cash flow while slowing repayment.
The lifetime totals assume 5% continues for every payment. The five-year contract does not guarantee that rate for the remaining 15 or 20 years. At renewal, the outstanding balance, new rate, remaining amortization and lender conditions determine the next payment. Ask for a quote showing fees, insurance, rounding and prepayment rules before comparing actual offers.
Principal
Principal is the amount borrowed or the remaining balance on which interest is calculated. Early payments on an amortizing loan often contain more interest because the outstanding principal is larger.
Interest rate
The interest rate is the price of borrowing, expressed annually. The periodic rate used in a payment calculation depends on the agreement's compounding convention and payment frequency.
Term
A term is the period during which specific contractual conditions apply. For a mortgage, the balance may remain at the end of a term and require renewal.
Amortization
Amortization is the planned repayment horizon. Extending it usually lowers each payment but increases the number of interest-bearing periods and therefore total interest.
- Shorter amortization: higher payment, usually less total interest
- Longer amortization: lower payment, usually more total interest
Compare total cost, not payment alone
Multiply the payment by the number of payments, then add fees not already included. The Financial Consumer Agency of Canada recommends understanding total loan cost rather than choosing only by payment size.