Buying a home is, for most of us, the biggest investment we will ever make. If getting a home loan isn't stressful enough itself, there is the added hassle of understanding some complex topics and language like loan amortisation, principal, and interest.
In this article, we'll go through a range of concepts relating to loan amortisation and mortgage payments, explain them in simple words, and help you figure out how to plan out your mortgage journey. By the end of this article, you should feel much more confident about what loan amortisation is, and how it will apply to you.
Please note, this article is for informational purposes only, and should not be considered financial advice. If you have questions about anything discussed in this article, you should speak to your bank, lender, or financial professional.
What Is Loan Amortisation?
Loan amortisation [1] just is a fancy way of saying paying off a debt with regular payments. When it comes to mortgages, this will often involve a repayment schedule for the loan. The exact structure of loan amortisation will depend on what you and your lender agree on, but typically it will be made up of the principal (the amount you originally borrowed) and the interest (the fee charged for borrowing).
The main benefit of loan amortisation is that it helps to spread out payments over a period of time, making them more manageable. It also means you can make regular fixed repayments, which makes budgeting easier as you know exactly what your mortgage costs are each month.
The loan amortisation structure typically made up of the principal and the interest
Amortisation Schedules
In most cases, amortisation loan payments will involve a loan amortisation schedule. This is a plan that outlines exactly how much you need to pay each month (or week or fortnight, depending on your agreement), and what portion of it is applied to the principal and interest. Most lenders will provide borrowers with an amortisation schedule for loan payments up-front so that they can properly track their payments over time.
Every amortisation schedule for a loan will be set up to be paid off in a specified amount of time; for example, a 30-year amortisation period would mean that your whole mortgage would be paid off in 30 years. The average amortisation period in Europe varies by country. In some countries, such as the United Kingdom, the typical amortisation period is 25 years, but in recent years, it has seen terms as long as 40 years [2]. In other countries, like Spain, the amortisation period is usually around 20 to 25 years [3], whereas in Italy, it can be anywhere from 5 to 30 years [4].
The length of your amortisation period will depend on a few factors, which we will discuss later.
When it comes to loan amortisation, the most important thing to remember is that your payments will be split between the principal and interest. In general, more of your payments in the early years of your mortgage will go towards interest, while later on, a greater portion of each payment will go towards paying down the principal.
How Do You Calculate Amortisation?
Calculating amortisation may look and sound quite complicated, but it's actually quite simple if you use an online amortisation calculator [5] to do the tricky work for you. To calculate amortisation, you will need to know the following information:
- The total amount of the loan or debt,
- The annual interest rate, and
- The length of the loan (in months or years).
Let's make an example with a €390,000 mortgage, which is the average price for a two-bedroom home in Germany [6], and use the above information to calculate the amortisation for that mortgage, assuming you are paying both principal and interest. Below is a table that might look intimidating, but it really just shows how much you would pay off in each of the 25 years of the mortgage.
You'll notice as the years go by, you are paying less on your interest and more on your principal. In the 25th year, you have paid off all of your interest and principal, so you have therefore paid off your entire mortgage.
Longer Amortisation Periods Reduce Monthly Payments
Some people might prefer to make their amortisation period longer to reduce their monthly payments. This is advantageous if you want to reduce your monthly expenses, but it can also be a disadvantage if you want to be mortgage-free earlier in life.
Additionally, the longer the amortisation period, the more interest you will end up paying over the life of the loan, which means you'll ultimately be paying more for your home in the long run.
If you want to consider making your amortisation period longer in order to reduce your monthly payments, you should sit down with your bank, lender, or financial professional, and discuss your options. They can provide you with more information and guidance on the right amortisation period for you.
Shorter Amortisation Periods Save You Money
On the other hand, some people might prefer to shorten their home loan amortisation period to save money on interest and be mortgage-free sooner. This is advantageous if you want to reduce the amount of time it will take for you to pay off your loan, but it could also mean that your monthly payments are higher than with a longer amortisation period.
Generally speaking, though, choosing a shorter amortisation period can help you save money in the long run, as your total interest payments over the life of the loan will be lower. It's important to calculate how much more each month it will cost you to pay off your mortgage sooner. You should also make sure that you can still afford those payments, as well as your other expenses.
Again, be sure to speak with your bank, lender, or financial professional to discuss your options and make sure that you choose the right amortisation period for you.
Сhoosing amortisation period, you form the mortgage terms convenient for you
How Can Making Extra Payments Help?
A loan amortisation schedule with extra payments can help you pay off your loan sooner and reduce the amount of interest you’ll pay over the life of the loan. When you make extra payments, the principal of your loan is reduced faster, and that means that you’ll be paying less interest in the long run.
If you think paying extra on mortgage instalments could help with your loan amortisation, be sure to speak with your bank or lender about the best way for you to make those extra payments. They can provide guidance on how much you should pay each month and the best way to structure those payments.
Exercising Additional Payment Options
When it comes to making extra payments on your mortgage, you have a few options:
- Paying an extra one-off lump sum,
- Increasing your monthly/regular payment amounts to pay extra on mortgage,
- Making additional payments whenever you have the extra funds available.
Which option you choose will depend on your own financial situation. Consider how much you can afford to pay each month, as well as what type of lifestyle you want to live and how much money you would like to save in the long run. Talk to your bank, lender, or financial professional to figure out the best payment option for you.
Understand Your Mortgage Payment
When you take out a loan, it’s important to understand your payment schedule and what happens when you make extra payments. Generally, an amortisation schedule for home loan payments means each month you will pay a combination of interest and principal on your loan. In the first years of your loan, most of the payment will go toward paying off the interest; then, as time goes on and you pay down your principal, more of the payment will go toward paying off the principal.
How to Calculate Mortgage Payments?
Calculating your own mortgage payments is quite easy with an online mortgage payment calculator [7]. To use a mortgage calculator, you will need the following information:
- Your total loan amount,
- Your amortisation period,
- Your interest term,
- Your interest type (variable or fixed),
- Your interest rate, and
- How often you make your payments.
By putting that information into the calculator, you will find out:
- Your monthly/regular payment amount,
- Your total payments, and
- Your total interest paid.
If you're not sure of some of the details needed to put into the calculator, a quick email to your bank or lender will provide you with the information you need. Your bank or lender will also always be on hand to help you understand your obligations, as it's in their interest that you understand your mortgage.
Considerations for Extra Payments
When it comes to making an extra mortgage payment, or a series of extra mortgage payments, there are some things that you should consider.
For example, if you have a variable-rate loan, you might want to make sure that the interest rate is low enough before you start paying extra. That way, you can ensure that the maximum amount of your payment goes towards reducing the principal and not towards interest.
You should also consider any fees and penalties you may be charged for making extra payments or paying off your loan sooner than expected. Some banks and lenders will charge a fee if you pay off your loan early, so it is important to ask about this before you start making extra payments.
Finally, it’s important to remember that you need to make sure that you still have enough money left over each month for your living expenses. Making extra payments is great for reducing your loan, but it shouldn’t come at the expense of basic necessities or other financial commitments.
When making extra payments, ensure you have enough money left over each month
Accelerated Payment Options
Homeowners can also choose to make accelerated payments, which means making payments more frequently than the standard monthly payments to accelerate their overall debt reduction. This can include bi-weekly payments or even weekly payments. These accelerated payments can help homeowners pay off their mortgage more quickly as more payments are made throughout the year. It also helps reduce the interest payments over the lifetime of the loan.
It's important to note that when making accelerated payments, homeowners should check with their bank or lender to ensure that the payments will be applied correctly and that there are no additional fees or penalties associated with making accelerated payments.
Loan Amortisation and Mortgage Payments — What's Next?
Loan amortisation is a simple but powerful concept that can help homeowners better understand the structure of their loan. Whether you're researching mortgages or already have one, understanding how amortisation works and how it affects your payments can help you make decisions to reduce the total amount of interest paid.
If you're interested in finding out more about loan amortisation or making extra payments, it's best to speak with your bank, lender, or financial professional. They can provide you with more information and help you make the most informed decisions for your mortgage.
Once you fully understand how your mortgage works, it can be an empowering tool to help you reach your financial goals. Taking a few minutes to understand the basics of loan amortisation can help you make better decisions about your mortgage and finances, which can ultimately lead to financial freedom.
Frequently Asked Questions
What is loan amortisation?
Loan amortisation just is a fancy way of saying paying off a debt with regular payments. When it comes to mortgages, this will often involve a repayment schedule for the loan. The exact structure of loan amortisation will depend on what you and your lender agree on, but typically it will be made up of the principal (the amount you originally borrowed) and the interest (the fee charged for borrowing).
What is the main benefit of loan amortisation?
The main benefit of loan amortisation is that it helps spread out payments over a period of time, making them more manageable. It also means you can make regular fixed repayments, which makes budgeting easier as you know exactly what your mortgage costs are each month.
What are the benefits of a short amortisation period?
Some people might prefer to shorten their amortisation period to save money on interest and be mortgage-free sooner. This is advantageous if you want to reduce the amount of time it will take for you to pay off your loan, but it could also mean that your monthly payments are higher than with a longer amortisation period.
How can making extra payments help?
Making extra payments towards your mortgage can help you pay off your loan sooner and reduce the amount of interest you’ll pay over the life of the loan. When you make extra payments, the principal of your loan is reduced faster, and that means that you’ll be paying less interest in the long run.
What information is needed to use a mortgage calculator?
To use a mortgage calculator, you will need the following information:
- Your total loan amount,
- Your amortisation period,
- Your interest term,
- Your interest type (variable or fixed),
- Your interest rate, and
- How often you make your payments,
By putting that information into the calculator, you will find out:
- Your monthly/regular payment amount,
- Your total payments, and
- Your total interest paid.
List of References
- Source: Forbes
- Source: Unbiased
- Source: Wise
- Source: Banca D’Italia
- Source: Calculator.net
- Source: Finder
- Source: Mortgage calculator
