Amortization

Amortisation is repaying a loan in regular instalments rather than one lump sum at maturity. Most mortgages and personal loans work this way, and each payment contains both principal and interest.

There are two main structures. Equal instalments keep the monthly total constant, which makes budgeting easy; equal principal repays the same amount of capital each month, costing more early on but less in total interest.

Equal instalments have a feature worth knowing. Early payments go mostly to interest while the principal barely moves. That is why, ten years into a thirty-year mortgage, the balance has fallen far less than you might expect.

So if you plan to prepay, doing it early has the greatest effect. Repaying while the outstanding principal is still large removes the most future interest. It is worth checking the monthly figure on a loan calculator first. Stretching the same loan by ten years lowers the monthly payment but raises the total interest considerably.