Understanding Mortgages: How Borrowers Save, and Investors Profit

As conversations around affordability and investment strategy heat up across Ontario’s housing market, it’s worth asking: how well do we really understand mortgages—not just as borrowers, but as investors?

Whether you’re a first-time homebuyer navigating your pre-approval, or a seasoned investor building out a portfolio, understanding the mechanics of how mortgages work is critical. More than just a way to finance a home, mortgages represent one of the most lucrative and predictable business models in finance. And for anyone, they offer both insight and opportunity.

What Is a Mortgage Really?

A mortgage is a secured loan issued by a lender, typically a bank or credit union, to help a borrower purchase real estate. The borrower agrees to repay the loan principal, along with interest and fees, over a fixed period of time. The property serves as collateral for the loan.

Mortgage payments are typically made on a monthly or bi-weekly basis and include both principal and interest components. What many borrowers don’t realize is just how front-loaded the cost of borrowing is: in the early years of a mortgage, the vast majority of your payments go to interest, not principal.

This design is no accident—it’s how lenders lock in predictable profits up front. That dynamic becomes even more significant when you consider how banks leverage mortgage interest in tandem with other fees and products. So if you're wondering how to save money over the life of your mortgage—or simply want to understand how to save on mortgage interest—the key lies in understanding this structure and working around it strategically.

How Banks Make Money on Mortgages

Banks and lenders don’t just profit from the interest you pay. Here’s a breakdown of their revenue streams from a standard mortgage:

• Interest Income: This is the primary profit engine. Even a 1% difference in rate translates to tens of thousands in interest over a 25-year amortization. Verily, a 1% rate difference on a $500,000 mortgage over 25 years could cost you more than $70,000 in additional interest.

  
  

• Mortgage Penalties: If a borrower breaks their mortgage early—by refinancing, moving, or selling—the lender often charges a prepayment penalty. These fees are designed to recoup lost interest and can range from a few thousand dollars to tens of thousands.

  
  

• Mortgage Insurance: Buyers who put down less than 20% are required to purchase mortgage default insurance. While this is issued through institutions, lenders often benefit from the arrangement through commissions or streamlined underwriting.

  
  

• Bundled Services: Lenders encourage borrowers to consolidate services—credit cards, HELOCs, even home insurance—alongside a mortgage. These products increase a customer’s lifetime value and add to the lender’s bottom line.

• Securitization: Some lenders bundle mortgages into mortgage-backed securities (MBS) and sell them to investors. This offloads risk while generating fees and liquidity.

  
  

Looking at Your Mortgage Through the Lens of Opportunity

From a borrower’s perspective, a mortgage doesn’t just have to be a financial obligation—it can be a powerful financial tool when approached strategically.

Yes, mortgages come with costs. But with the right mindset, borrowers can make decisions that not only reduce those costs but also build long-term financial flexibility and security. The key is to stop thinking of your mortgage as a set-it-and-forget-it payment, but rather, take an active role in managing your mortgage and explore strategies to help reduce interest payments and pay off your mortgage faster.

Here are 5 ways to save on mortgage interests and pay down your loan faster:

1. Increase Payment Frequency 

Switching from monthly to accelerated bi-weekly payments can reduce the amortization period by several years and save thousands in interest. With accelerated payments, you’re making the equivalent of one extra monthly payment per year.

 2. Make Lump Sum Prepayments

Most lenders allow annual lump sum payments of 10%–20% of the original mortgage balance without penalty. These payments go directly toward the principal, reducing the interest charged over time.

Example: A $10,000 lump sum payment in year 2 of a 25-year mortgage can reduce your total interest by over $18,000 and shorten your amortization by more than a year—proving that small decisions early in your term can yield massive results.

 3. Opt for a Shorter Amortization

While a 30-year amortization lowers monthly payments, it significantly increases total interest paid. Choosing a 25-year or even 20-year amortization can lead to large long-term savings if your budget allows for slightly higher monthly costs.

 4. Round Up Your Payments

Rounding up a $1,542 mortgage payment to $1,600 or $1,700 may not seem like much month to month, but that extra amount chips away at your principal and reduces overall interest over time.

 5. Refinance Strategically

If interest rates drop or your financial situation improves, refinancing your mortgage can help reduce your rate or shorten your term. Be sure to weigh potential savings against any penalties or fees.

The Investor’s Angle: What You Need to Know

At the same time, from an investor’s perspective, the consistency of lender profits leads to another question: If banks can generate reliable returns from mortgages, is there a way for individual investors to tap into that same upside?

Mortgages may seem like a borrower’s tool, but for investors, they represent a valuable source of predictable, interest-based income—especially in an environment of elevated rates and renewal stress.

Just as borrowers can play offense with their mortgage, investors can also learn to play like the banks. Here are four strategic angles to consider:

1. Private Lending Mirrors Bank Strategy

Just like a bank, private lenders earn interest and charge origination or renewal fees. By pooling capital (individually or through a mortgage investment corporation or joint venture), investors can lend directly to borrowers—often at higher interest rates than traditional lenders, due to risk or timeline constraints.

2. Leverage Still Works—Even When You’re the Lender

Most people associate leverage with borrowing to invest. But savvy investors can also use leverage to fund their lending activities, earning a spread between what they borrow at and what they lend at. When structured well, the yield can far outpace passive investments.

3. Understand the Borrower’s Pain Points

Interest rate risk, prepayment penalties, and renewal uncertainties all weigh heavily on borrowers. These same pressures can create opportunity for investors who understand how to offer flexible or short-term lending solutions—whether for bridge loans, down payment gaps, or cash-out refits.

4. Debt Is a Business Model

For the banks, mortgages aren’t just a service—they’re a product. Investors who adopt the same lens can move beyond traditional buy-and-hold real estate into cash flow opportunities that aren’t tied to property appreciation alone.

Mortgage Literacy Is Financial Agility

In today’s climate of rising rates, tighter lending rules, and increased default risk, the winners will be those who don’t just react—think strategically, like the institutions that shape the market.

By staying informed about how banks structure mortgages for profit, investors can reverse-engineer similar models to generate their own passive income streams—whether through private lending, co-lending partnerships, or even REIT and MIC investments.

At Medvisory, we help physician investors adopt the same mindset that banks use—by showing them how to shift from borrowers to lenders, from reactive to proactive, and from asset owners to income stream creators.

Because when you understand how the mortgage system works behind the scenes, you’re no longer just part of the housing market—you’re poised to profit from it.