A very important element of the loan is the amortization plan.
Very often we worry about what the amount of our mortgage payment can be, and rightly so: it is from the value of the installment that we will be able to understand if we will be able to sustain the effort that will be required to repay the sum that it was given to us and if this could have a significant impact on our standard of living.
But the amortization plan is a document that can give us a lot of valuable information if we know how to read it well. As we will soon see, it is a tool that can be useful for the entire duration of the loan:
- in the initial phase, to predict how it will evolve over the years;
- during the entire duration of the loan, to monitor the situation and eventually decide whether, for example, to anticipate the extinction of a part of the capital.
The amortization plan can be estimated in advance and is one of the important documents to be requested from the bank in the initial phase, the one in which we are deciding the Institute turn to. The elements needed for its calculation are 3:
- the amount paid;
- the interest rate;
- the duration of the loan.
Let’s see a practical example, in which we want to simulate the amortization plan in a “school” case:
- disbursed capital: 100,000 euros ;
- interest rate: fixed, equal to 3% ;
- duration of the loan: 10 years.
The table below shows the first part of the amortization plan, with some key values highlighted below.
There are at least four important information in the amortization schedule
Let’s look at them in detail:
- The number of installments ;
In the first column is the number of the installment, in total, we will have in this case 120 rows (12 for each year of loan duration).
- The amount of the installment ;
In the second column, we find the amount of the installment. In this case, being a fixed rate mortgage, we will have the guarantee that this value will remain constant for the entire duration of the loan.
- The remaining credit ;
The remaining credit is shown in the second column. It is the part that remains of the capital that we will still have to repay, calculated from time to time at the time corresponding to the payment of each specific installment.
There are two things to note:
– the remaining credit is very important if we want to pay off the loan early, or part of it. In the event that we wanted to extinguish it completely, in fact, it would indicate just the amount we will have to pay. In the case of partial extinction, the new installment we are going to pay will depend on the percentage value of what we will pay compared to the remaining credit.
– if we note the residual credit at the twelfth installment, we see that the value is not equal to 90% of the amount disbursed (90,000 euros in this case) but is higher. In other words, in the first period the residual credit decreases less than proportionally with respect to the duration of the loan. This is because in the first part the interest is paid more.
- Capital and interest share.
The last two columns show, for each installment, the principal amount and the interest portion. The sum of these two values is equal to the amount of the installment (966 euros in this case).
So, for example, the first installment will consist of:
– a principal of 716 euros, which constitutes the part of the installment intended to lower the residual credit;
– an interest share of 250 euros, ie the part of the installment that remunerates the advance of the capital disbursed by the bank.
It is interesting to note, for example, comparing these values with those relating to the installment n. 19, how the principal amount increases and that interest decreases over time, confirming what was said in the previous point: in the first part the interest is paid to a greater extent.
Now let’s see what happens at the end of the amortization period.
The installment has always remained the same, obviously. The interest rate has fallen, almost to zero, and almost all the amount of the installment is destined to lower the (little) remaining credit left. With the last installment (No. 120) we finally extinguish all the remaining credit and, consequently, the mortgage itself.
The amortization plan for variable rate mortgages
In the case of a variable rate loan, the amortization plan gives us the same information. It must however be taken into account that, when it constitutes a forecast, we cannot know in advance how the rate will evolve. So the plan calculated before the loan agreement is signed will consider the interest rate in effect at the time. The amount of the installment thus calculated, and the interest rate, may change over time based on the interest rate trend.