Even if you’re new to the real estate game, you’ll know that mortgage payments can be overwhelming for any homeowner and if prospective buyers are in the middle of settling a mortgage, they’re in the realm of mortgage amortisation.
Amortisation is the act of eliminating debt by making regular payments over time according to a set schedule. Having a clear sense of how it works is important for any professional, investor or owner-occupier. Why? Because it affects monthly payments and the total amount of interest to be paid over the life of the loan.
The Basics of Mortgage Amortisation
At its core, mortgage amortisation revolves around the principal amount borrowed and the interest charged by the lender. The principal is the initial loan amount, while interest is the fee for using the lender’s funds.
Although a borrower aims to repay the borrowed amount, the majority of early mortgage payments primarily cover interest. Gradually, as payments progress, more funds are allocated to reducing the principal balance.
The fine details of mortgage amortisation are normally shown through a loan amortisation calculator, where borrowers can calculate the division of their monthly payments between interest and principal.
The Amortisation Schedule Demystified
An amortisation schedule serves as a roadmap for borrowers, detailing how each payment contributes to interest and principal over the loan term. This schedule provides insights into the evolution of the loan balance, interest paid, and the proportionate decrease in the principal with each payment.
For example, a 30-year mortgage entails 360 monthly payments, while a 15-year mortgage involves 180 monthly payments.
Not all mortgages fully amortise over time as certain loans come with a balloon payment. This is where borrowers make smaller monthly payments, not fully covering the entire balance, and then settle the remaining amount with a lump sum at the end of the loan term. This necessitates careful financial planning.
An amortisation table can help visualise equal monthly payments for a specific period, followed by a substantial final payment.
Beware of Negative Amortisation
While lenders may offer flexibility in the form of minimum monthly payments, borrowers should be advised to avoid negative amortisation. This occurs when minimum payments fail to cover accruing interest, leading to an increase in the principal balance. Homebuyers might witness their loan amount rise instead of decreasing over time, particularly with specialised mortgages like graduated payment mortgages or payment-option adjustable-rate mortgages.
Making Informed Decisions
As a property professional, it is important to possess a solid understanding of mortgage amortisation in order to offer valuable guidance to prospective buyers looking to make well-informed financial decisions.
By assisting them in determining an affordable budget, you not only establish trust but also build a reputable reputation, paving the way for an expanded client base.
Property Opportunities with ALC
If your clients are in a position to build or grow their property portfolio, consider exploring ALC’s exclusive, new home and land packages. Connect with our team to discover how ALC can provide a property that aligns with your buyers’ criteria.