How Amortization Builds Equity on a Rental
The quietest source of return in rental property, and the one that behaves in the least intuitive way.
86% interest
Share of a year-one payment on a 6.75% 30-year loan that is not principal.
How the split works
Every payment is the same size, but its composition changes with every instalment. Interest is charged on the outstanding balance, so as the balance falls the interest portion falls and the principal portion — the remainder — grows. The result is a curve, not a line.
$180,000 at 6.75%, 30 years — $1,167 a month
- Year 1 interest
- $12,062
- Year 1 principal
- $1,947
- Interest share of year one
- 86%
- Total paid over 30 years
- $420,270
- Total interest over 30 years
- $240,270
You repay the loan, and then you repay it again in interest.
The curve, decade by decade
| Year | Principal repaid that year | Balance at year end | Share of payment going to principal |
|---|---|---|---|
| 1 | $1,947 | $178,053 | 13.9% |
| 5 | $2,512 | $168,977 | 17.9% |
| 10 | $3,529 | $153,544 | 25.2% |
| 15 | $4,919 | $131,945 | 35.1% |
| 20 | $6,894 | $101,691 | 49.2% |
| 25 | $9,647 | $59,329 | 68.9% |
Why this matters for short holds
The crossover
The point where principal first exceeds interest in a single payment arrives at month 236 on this loan — during year twenty. That is unintuitive, and it is the direct consequence of a rate above the amortisation curve’s midpoint: at 4% the crossover would arrive years earlier; at 8% later still.
It also explains why the second half of a mortgage feels completely different from the first. Between years 20 and 30 you repay roughly $100,000 of principal; between years 1 and 10 you repay about $26,500.
Paydown as return
In year one this loan returns $1,947 of principal — roughly twice the $995 of cash flow. It is genuine return: your net worth rises by it. It is also not money, and the distinction matters in three ways.
| Property of paydown | Consequence |
|---|---|
| It is not spendable | It cannot fund a roof or cover a vacancy. Only cash flow and reserves do that. |
| Accessing it costs money | Selling costs 6–9%, or a refinance at today's rate on the whole balance. |
| It is invisible to cash-on-cash return | Which is why a 1.5% cash-on-cash deal is not a 1.5% deal — see the five ROIs. |
| It accelerates automatically | The one component of return that improves with no effort or market cooperation. |
The clean way to handle it is to show it as a memo line beneath cash flow in your pro forma — counted, but never mixed into a cash figure.
Should an investor pay extra?
Adding $100 a month to the payment
- Payoff time
- 30 years → 23.8 years
- Total interest
- $240,270 → $182,349
- Interest saved
- $57,921
- Effective return on the extra payments
- 6.75%, guaranteed and tax-adjusted
A risk-free 6.75% — which is the whole argument, in both directions.
Paying down debt returns exactly your interest rate, with no vacancy risk and no market risk. That is genuinely attractive at 6.75%. The counter-argument is opportunity cost: the same $1,200 a year compounds toward a down payment, and a new property brings cash flow, paydown, appreciation and depreciation rather than only avoided interest.
A useful middle position
You can see the full schedule for any loan in the free calculator, alongside what each rate does to the mortgage constant — the figure that decides whether the loan is helping you at all.
Frequently asked questions
How much of my rental mortgage payment goes to principal?
On a 6.75% thirty-year loan, about 14% in the first year — the other 86% is interest. The principal share rises every month, passing 25% around year ten and overtaking interest during year twenty.
Is principal paydown part of my return?
Yes, but not part of your cash flow. It increases your equity and therefore your net worth, and on a typical leveraged rental it exceeds the cash flow in the early years. It cannot pay for a repair or a vacancy, and accessing it requires either a sale or a refinance.
Should I pay extra on a rental property mortgage?
Extra principal earns a guaranteed return equal to your interest rate, with no market or vacancy risk. Whether that beats deploying the same money into another property depends on your alternatives, but it is a reasonable choice when coverage is thin or you have no immediate use for the capital.
What is a mortgage recast?
Re-amortising the loan after a lump-sum principal payment, so the remaining balance is spread over the original term at a lower monthly payment. Unlike ordinary prepayment, which only shortens the term, a recast improves your monthly cash flow and coverage ratio. Not every servicer offers it.