What is the difference between principal and interest?

Principal is the actual money you borrowed and must repay. Interest is the fee the lender charges for lending it, calculated on the remaining principal balance.

Why does so little of my early payment reduce the principal?

Interest is charged on the full outstanding balance, which is largest at the start. As you pay the balance down, the interest portion shrinks and more of each payment goes to principal.

Does a prepayment go entirely to principal?

Yes. A qualifying prepayment is applied directly to the principal balance, which immediately lowers the amount future interest is calculated on and shortens your amortization.

Mortgage Glossary

What is Principal?

Principal is the amount of money you actually borrow to buy a home, before any interest is added. It is the purchase price minus your down payment, plus any insurance premium added to the loan. Each mortgage payment splits between interest and principal, and paying down principal is how you build equity over time.

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Quick answer

Also known as: loan principal, mortgage principal

Key points

Principal is the borrowed amount itself, not the interest on it.
It starts as the home price minus your down payment, plus any insurance premium added to the loan.
Interest is charged on the outstanding principal balance.
Early payments are mostly interest; later payments reduce more principal.
Paying down principal is how you build home equity.

Principal explained

Principal is the core debt of your mortgage, the dollar amount you owe the lender separate from the interest charged for borrowing it. At the start, it equals the home price less your down payment, with any mortgage default insurance premium often added on top. Interest is calculated on the outstanding principal, so the balance you owe is the engine that drives your interest cost.

Every regular payment is divided between interest and principal. Early in the amortization, most of each payment covers interest and only a little reduces principal; as the balance falls, more of each payment goes to principal. Reducing principal, whether through scheduled payments or prepayments, is exactly how you grow your equity and shorten the life of the loan.

What a Principal is for

The principal is the figure your interest is calculated on and the amount you must eventually repay in full. It defines the size of your debt, anchors your monthly payment, and determines how much equity you have at any point. Understanding it separates the cost of borrowing (interest) from the debt itself (principal), which is essential for judging prepayments and refinancing.

How it can help you

Knowing how principal behaves helps you see why early extra payments are so powerful: a dollar applied to principal removes all the future interest that dollar would have generated. It also clarifies how much you truly owe versus how much you are paying to borrow. When you compare lenders, a lower rate means more of each payment attacks principal; Lenderoo lets you compare rates across 40+ lenders for free so more of your money builds equity instead of paying interest.

When it comes up

A buyer purchases a $400,000 home with a $80,000 down payment, leaving a $320,000 principal. Each month their payment chips away at that balance. By making an annual lump-sum prepayment straight against principal, they cut the outstanding balance faster, reduce total interest, and shave years off the amortization.

Example: how a payment splits between principal and interest

You owe $320,000 at roughly 5% interest, with a monthly payment near $1,860 on a 25-year amortization. In the first month, about $1,330 of that payment is interest and only around $530 reduces principal.

A few years in, after the balance has dropped, the split shifts: more of the same payment now goes to principal and less to interest. This is why a lump-sum prepayment applied directly to principal early in the term saves so much, it erases the interest that balance would have cost for years to come.

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Questions & answers

Principal: frequently asked questions

Common questions Canadians ask about principal.

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