One of the trickiest things to get to grips with when it comes to mortgages is mortgage amortization.
What is it, and why is it important to understand how it works?
Here at Ocean, we want to clear up all that financial jargon. Read our guide to mortgage amortization, and hopefully it'll all become clear.
Mortgage amortization is the breakdown of how much of your monthly repayment goes towards paying off the money you’ve borrowed, and how much goes towards paying the interest your lender charges.
You can use this calculator to get an idea of how mortgage amortization works. As you’ll see, during the first years of your mortgage term the amount of interest you’ll pay will most likely outweigh the amount you pay towards the actual capital of your home. And as you approach the end of the term, you’ll pay more towards the capital balance than you will on interest.
How does this work?
Basically, you’re charged interest on the outstanding balance of your mortgage. As you clear more of the debt, there is less outstanding on which to pay interest. That’s why the amount of interest you pay each month goes down.
Of course, all of this is based on the interest you pay remaining the same for the entire term of your mortgage, which is unlikely. Some lenders offer fixed-rate mortgages that last ten years, but most mortgage terms are twice as long so you should expect the interest you’re currently charged to change at some point. It could go up, or it could come down.
If you’re on a tracker mortgage, your repayments could fluctuate regularly in-line with interest rates. It’s therefore worth frequently checking your amortization schedule.
Regardless of changing interest rates, a mortgage amortization schedule is still a useful thing to look at to help you understand the balance between the interest you’re paying and the capital.
Will my payments go down?
As we mentioned earlier, the longer you pay your mortgage for, the less interest you’ll pay on the capital. However, this doesn’t mean your monthly repayments will come down. It just means that a greater proportion of your repayment will go towards repaying the actual capital of your debt.
It is possible to overpay. Your lender will agree your monthly payments including interest with you, but if you think you can afford to pay more each month you could do so. This will reduce the length of time you’re making mortgage payments for and save you money on interest.
However, if you’re thinking of doing this be sure to speak to your lender. Some charge you for overpaying your mortgage early, so make sure you won’t actually end up paying more for this than you’ll save on interest by overpaying.