Amortisation

What it is

Amortisation is simply the schedule by which your mortgage gets paid off. Instead of paying interest in one lump sum and the loan amount in another, a mortgage combines both into one steady monthly instalment for the whole tenure, and amortisation describes how that single number is quietly divided between interest and principal paydown each month, though the exact split changes over time even if the instalment itself does not.

How it works

Interest is calculated on whatever principal is still outstanding. At the start of a loan, the outstanding principal is at its highest, so a bigger slice of each instalment goes toward interest and only a small slice reduces the principal. As the outstanding principal falls month after month, the interest portion shrinks and the principal portion grows, even though your total instalment usually stays roughly flat throughout a fixed rate period. This means the loan balance falls slowly at first and then more quickly in the later years of the tenure.

A simple worked illustration

Take an illustrative loan of 500,000 dollars over 25 years at 1.5 percent per year, with a monthly instalment of roughly 2,000 dollars, a rounded made up figure. In month one, perhaps 625 dollars of that instalment is interest and 1,375 dollars reduces the principal. By year 20, with the principal much smaller, the same 2,000 dollar instalment might carry only around 150 dollars of interest and 1,850 dollars of principal paydown. The numbers are illustrative only, and every real loan schedule differs.

What first time buyers get wrong

• Assuming equal monthly instalments mean equal progress against the loan balance every month, when the early years make far less of a dent in the principal than the later years.
• Believing that a lower monthly instalment on a longer tenure always saves money, when a longer amortisation period usually means paying more interest in total over the life of the loan.
• Not realising that a partial prepayment in the early years, when interest makes up most of the instalment, tends to save more total interest than the same prepayment made later.

What to check

Ask your bank for a full amortisation schedule so you can see exactly how the interest and principal split changes year by year for your specific loan. Use this to think through whether an early partial prepayment or a shorter tenure makes sense for your own cash position, and confirm the actual numbers with your bank rather than a general example like the one above.

Winfred Quek is an Associate Marketing Consultant at Crestbrick Pte Ltd (CEA Licence No. L31010886H). CEA R073319H. This page is for general information only and does not constitute financial, investment, or legal advice. Verify current figures with IRAS, HDB, CPF Board, or MAS before making any decision.