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What is mortgage amortisation?
When you take out a mortgage, your lender will tell you what your monthly payment is. But how much of your monthly payment (on a repayment mortgage) goes towards paying off the interest and how much goes towards repaying the capital? The answer is that it varies over the life of your mortgage. At the beginning, a larger proportion of your repayments are put towards the interest. In the later years, more goes towards capital repayments. Exactly how this is worked out is known as the amortisation schedule.
The word amortisation simply describes how the amount you originally borrowed in your mortgage decreases after each payment you make. When you make a payment, part of it is put towards paying off the principal (the money you borrowed) and the rest is put towards paying the interest.
Getting your own amortisation schedule
An amortisation schedule provides you with a monthly breakdown of how much you have to repay on your mortgage, as well as the interest you’ll have to pay. You may decide that you don’t need or want to know this – you are just happy to make the payments due – and that’s fine! However, if you do want to know more then you can look at the amortisation schedule for your mortgage, which will let you know how much your outstanding debt was before you make a payment, and how much it will be afterwards. You’ll also be able to look at how much you will have cleared on your mortgage many months down the line, providing you’re fixed into the same interest rate.
To get your hands on an amortisation schedule of your own, there are plenty of websites that offer calculators you can input details about your mortgage into. Here’s a mortgage amortisation calculator you can use for free.
Throughout the term of the mortgage, you should notice both your capital balance and the amount of interest you pay each month decrease. The reduced interest amount will instead be put towards paying off the principal, so your monthly repayments won’t change, but you’ll be paying off more of the debt itself rather than in interest. This is because the interest is calculated as a percentage of your outstanding loan, so the more you pay off, the less you have to put towards paying interest.
Remember that the amortisation schedule for your mortgage will change when interest rates change. So, if your fixed rate deal come to an end, or if interest rates vary, you may want to recalculate it.
Your lender will likely have their own amortisation schedule for keeping track of your mortgage, and these may be more complex as to incorporate changes in interest rates.
Looking to remortgage?
Depending on the length of your discount or fixed rate mortgage deal, you’ll probably reach a point where you will either consider remortgaging or face being moved on to your lender’s Standard Variable Rate (SVR) – which might spell increased interest rates.
It’s a good idea to shop around to find the cheapest rate when your existing mortgage deal comes to an end, as your existing lender may not currently offer the most competitive rates. A mortgage broker like Ocean can help you to find a remortgage deal suited to your needs. Once you have remortgaged, if you want you can update your amortisation schedule with the new information.