THE GLOSSARY · DEBT
Amortisation
Your payment never moves. What is inside it does: over twenty-five years, you wait ten and a half before principal overtakes interest.
By the Yoseri News desk · · 1 min read
You have been paying the same amount every month for years, and your balance has barely moved. That is not a feeling. Amortisation is the way your loan repays itself: your payment stays identical, but the share going to interest and the share going to principal slowly swap places.
The reason fits in one sentence: interest is always worked out on what you still owe. High balance at the start, so high interest at the start, so little principal repaid — so the balance falls slowly. The mechanism runs against you, and it runs on its own.
Take $350,000 at 4.79% over 25 years. Your payment is $1,993.98 from the first day to the last:
| Payment | Interest | Principal |
|---|---|---|
| 1st | $1,383.34 | $610.64 |
| 61st — after 5 years | $1,220.28 | $773.70 |
| 126th — after 10 years 6 months | $994.15 | $999.82 |
| 300th — the last | $7.85 | $1,986.13 |
On your first payment, 69% goes to interest. You wait until the 126th — ten and a half years — for principal to finally take over. On the last one, interest weighs just $7.85.
That is also why an extra payment earns you far more early than late: it goes straight at principal, and therefore at every dollar of interest that principal would have carried to the end.
Where the figures come from
The maths in this article starts from the assumptions written above. Run them again with your own figures — you should land on the same numbers.
Yoseri News is an educational publication. Nothing in this article is investment advice, a recommendation to buy or sell, or tax advice. Yoseri is registered as neither an adviser nor a dealer with any market authority.