Mortgage Amortization refers to the process of paying off debts by repaying the regular
and principal amounts before the mortgage tenure reaches maturity. An amortisation mortgage
a fixed interest rate for its entire tenure.
The primary characteristic of amortisation is that initially, a major chunk of your EMIs goes towards paying the interest amounts. But over time, as the interest amount decreases, most of your mortgage instalments go towards fulfilling your principal mortgage amount. An amortisation is easier to manage than other debts as in it you know exactly when and how much to pay.
An amortisation schedule lists the following items:
You can calculate the monthly amortisation amount by considering the mortgage amount and interest rate. Monthly payment= A [ I (1+i) ^ n / ((1+i) ^ n) - 1)]
The mortgage amortisation calculator offers results of multiple variables with respect to a mortgage.
Monthly Payment: The monthly payments include how much of the principal and interest amount you are going to pay each month.
Total Principal Amount: The total principal amount is the total mortgage amount that you have borrowed from the bank. It, therefore, equals the property price and closing costs (if any) with only the down payment amount subtracted.
Total Interest Amount: Covering a major chunk of your mortgage cost, especially if you opt for a full term of 15 to 30 years, is your total interest amount. To comprehend the true long-term cost of borrowing, you can add your mortgage insurance premiums and closing costs to it.
Estimated Final Date of Payment: This is the date on which your mortgage tenure will mature. Technically, it is the same date on which your mortgage amortisation starts. So, if your mortgage amortisation of 30 years starts on May 1, 2022, its maturity date will be on May 1, 2052.
Running Total of Interest: It is the column in the amortisation schedule that shows you the total interest amount you have paid in a year during your ongoing amortisation period. For instance, you have paid $5,000 in 2020, $7000 in 2021, etc.
Total Balance Remaining: This simply demonstrates the annual remaining mortgage amount that you still have left to pay. It helps you understand how close you are to completing your mortgage repayment.
Amortisation Periods: With shorter amortisation periods, principal payments become higher, but the interest payable decreases drastically. The mortgage will be repaid earlier. This strategy should be used only if you can pay higher instalments of the principal amount.
Extra Principal Payments: Longer amortisation periods accelerate the payment. By using this method, you save more on interest. It adds extra payments to the monthly repayment. This strategy helps you become debt-free faster. For example, if a borrower has a $100,000 mortgage amortised over a tenure of 20 years with an rate of interest of 6.45%, and they have repaid by paying extra principal, then they can save nearly $30,000 over the mortgage term.
Lump Sum Payments: They are made in addition to regular payments to shorten the mortgage payment period. Such lump sum payments usually affect the earning potential of banks; therefore, the latter usually charge penalties or place limits on the maximum amount for lump sum repayments.
A mortgage amortisation schedule is a table that shows the amount of principal and interest components payable monthly. As you keep paying off the mortgage, the portion of the interest component gradually decreases, leaving only the principal component. It is displayed in a table format at the beginning of the mortgage.
Each row represents payment details for a single month. The rows are organised in chronological order, wherein the first row shows the first month’s details, and the last row lists the last month’s details. The mortgage amortisation schedule can be generated by using an amortisation calculator. It acts as a tracker for the borrower to monitor the amounts owed and repaid.
|# Payment||Beginning Balance||Principle||Interest||Ending Balance|
Amortisation can be done in multiple methods.
In straight-line amortisation, the interest payable is divided equally over the term of the mortgage. It is a simple method as the principal and the interest component payable are constant throughout the tenure.
As the tenure of the mortgage progresses, the interest amount payable decreases while the principal amount payable increases. In this case, the periodic payment is greater than the interest payment. Lower interest rates result in faster repayment.
The annuity method in mortgage amortisation includes numerous equal payments. Annuities can be classified as ordinary annuities and annuity dues. An ordinary annuity is paid at the end of each period as opposed to when payments are made at the beginning of each period. The longer the mortgage tenure and the higher the rate of interest.
In a balloon mortgage, the borrower repays the mortgage at maturity. The mortgage is repaid in small instalments, with a majority of the repayment being made at maturity. As the tenure progresses, the outstanding balance decreases until it reaches zero at maturity.
In a bullet mortgage, only the interest component is covered. At maturity, the entire principal is repaid. There is no change in the outstanding mortgage balance during the term, and it is zeroed out at maturity.
In this method, the total payment of the tenure is less than the interest payable during the tenure. Here, the interest payable gets accumulated and becomes outstanding.
An amortisation schedule contains the instalment amount, principal and interest payable over the mortgage tenure. The schedule is prepared in an Excel sheet. Monthly Periodic Payments- The periodic payments are calculated via the Ordinary Annuity method.
Monthly payment paid= I*PV/ 1- (1+i)^n
The borrower has to pay interest on the mortgage amount during repayment of the mortgage.
Principal Amount Calculation: Interest and principal are the components of the monthly payments. Hence, the principal amount is between periodic payments and interest.
Monthly Payment= I*PV/ 1- (1+i)^-n
MP = 0.005* 200,000/ 1- (1+0.005)^-36
(Interest per annum is 6%. Hence, monthly interest is 0.06/12=0.005)
Interest Payable= P*I
Principal payable= Monthly Periodic Payment - Interest payable
Principal payable= $6084.39 - $1000
Balance= $200,000 - $5084.39
Ans: Amortisation is the time taken by the borrower to repay the mortgage. The amortisation primarily depends upon the current year's rate of interest. The longest amortisation period a borrower is allowed is 20 years if the down payment is less than 20% of the mortgage value.
Ans: The mortgage term and mortgage amortisation can be different. Such a setup is called split amortisation.
Ans: Mortgage amortisation is easier to handle than other types of mortgages. The amortisation schedule helps you monitor payments already made and upcoming payments.