Amortisation...what is it?
To pay off principle and interest under a loan over a period of time.
Amortisation is the actual function of repaying your loan and its pretty cool to graph. Basically, your typical principal and interest repayment is made up of the interest due on the outstanding balance, and an amount calculated to repay the principal over the remainder of the loan term. The next repayment is the same amount but because the interest is less (because the balance has dropped from the amortisation) then more goes to principle and so on and so forth until it’s all paid off.
Amortisation looks really slow in the beginning – and it is, because the interest is highest while the balance is highest, but if you can remember how this works then you can easily see why its so effective to make extra repayments.
Lets take a look:
In our example we are looking at a $300,000 over a thirty year term with an interest rate of 4.55% pa
In the beginning the principle is as little as $392 of the $1529 monthly repayment.
Its not rocket science, the one and only way to pay the loan off faster and reduce the interest is to pay more into the loan (or related offset account) as soon as you can and reduce that balance – either regular repayments or one off lump sums, or a combination of both. Which is why weekly or fortnightly repayments speed things up – both because they get the money in there sooner and because the way they are calculated means you actually make an additional one months repayments each calendar year.