What is amortisation?
Amortisation divides a loan into fixed payments over time, allowing the borrower to pay off the principal and loan interest without making a large lump sum payment.
As a result, each monthly payment includes both interest and principal payments, with the proportion varying throughout the repayment period.
The process involves calculating the precise amount of each payment so that the loan can be paid off within a predetermined period, usually 15 to 30 years. This predetermined time frame is commonly referred to as the loan term by bankers and brokers.
Opting for amortisation can make a home loan more affordable by providing a fixed-rate payment method that can be budgeted for each month.
In Singapore, mortgages generally follow a fully amortising system. This implies that if a loan has a 25-year term, the borrower will have fully repaid the principal amount by the end of the term as long as they have made regular monthly payments.
What does an amortisation loan schedule look like?
The amortisation schedule provides a detailed monthly breakdown of the principal and interest payments for an amortised loan. While the monthly payments are constant, the amount of interest and principal paid will vary each month due to the changing loan balance.
Initially, the payment’s interest portion typically makes up a larger portion of the total payment and gradually decreases over time.
Conversely, the principal portion of the payment is initially smaller and increases towards the end of the repayment period.
Understanding how to read and use an amortisation schedule is essential for managing your mortgage payments. The borrower and lender can track future payments and remaining loan balances using the schedule.
How would an unamortised loan work?
If a lender has an unamortised loan, they will only pay the interest during the loan period, with the principal balance paid in a lump sum at the end of the loan term.
Although monthly payments are lower in unamortised loans, the borrower needs to plan and save for the balloon payment due at the end of the term.
However, the lender can make extra monthly payments to the principal loan during the loan term, easing the burden of paying the balloon payment all at once.
