Definition of Amortization

The preparation of a payment plan for a loan which allows for equal payments to be made to the creditor at consistent intervals over the life of the loan (the amortization period). Each payment covers interest accrued over the interval period with the remainder of the payment being applied to reduce the principal owed. If every payment is made on time and in full over the amortization period, the loan will be completely repaid at the end of the amortization period.

The process of paying the principal and interest on a loan through regularly scheduled installments. Initially, most of each payment is applied toward interest owed, and later in the loan term increasingly applied toward principal.

The gradual reduction of a debt by means of a regular payment. Repayments of principal and interest in “blended” amounts. The normal amortization period for a mortgage in Canada is 25 years, but can be as short as 5 years or as long as 25 years.