What is Amortization?


Amortization refers to the process of spreading payments over multiple periods to pay off a loan

So the process of paying off your mortgage or car finance loan is known as amortization.

All loans come in four parts: principle, interest, capital borrowed and the term.

Principal

Principal is the amount you pay towards an asset or investment. It is your equity in an asset or investment. E.g a house worth £500k. You pay a principal of £100k and get a mortgage on the remaining £400k. ⠀⠀

Loan terms

Loan terms will vary due to the size of the loan. Personal loans will usually have terms of 6 months to 5 years whilst mortgages will have terms of 15 years to 30 years.

Amortization essentially increased the affordability for loans by spreading the repayment over a longer term.

When you pay off a loan, your monthly repayments will include both interest and principal repayments. In the first few months of the loan your monthly payments will consist of mostly interest payments and less capital repayment. This is mostly because as you make your monthly payments and pay off the capital you are being charged interest on a smaller amount of capital.

In reality, it is simply a way for lenders to gain most of their interest back in the initial phase of a loan repayment and therefor reduce their risk if you default as they can simply sell the asset to recover their loan or sell the debt to a collection agency to recover.⠀

⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀
The term you choose will define the length of time it will take you to pay back the loan. It's a useful tool in property as property prices tend to increase. ⠀
⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀
knowing this makes it easier when it comes to planning and understanding the milestones of your mortgage.

For example:

The point at which the amount you have paid off outweighs the amount owed and hence you know own more on your property than you owe. How much interest you’ve paid off in total? etc

Your amortization timeline will differ based on factors such as how much you can afford to repay per month, the principal or deposit you put down, your interest rate and the capital you borrow.⠀
⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀
There are loads of online calculators that help you to discover the amortization timeline based on different property prices. Check out the Huuti dashboard to find out exactly how this journey breaks down for you.

Subscribe to Huuti