amortisation
Amortisation is paying off a loan in regular instalments, where early payments are mostly interest and later ones mostly principal.
In plain English
You have been paying a mortgage for four years and you check the balance, and it has barely moved. You have not been cheated. You have met amortisation.
An amortising loan is repaid in equal instalments, but each instalment is split between interest and principal, and the split shifts over the life of the loan.
Early on, most of your payment is interest, because interest is calculated on the outstanding balance and that balance is at its largest. Only a small sliver reduces the principal. Later, as the balance falls, the interest portion shrinks and more of each payment goes to the debt itself.
Which means the first years of a long loan are, in truth, mostly rent paid on money.
Two consequences follow, and both are worth acting on.
Ask your lender for the amortisation schedule. It shows exactly how each payment is split, and every borrower should see it once.
And understand that any extra payment made early is extraordinarily powerful, because it reduces the balance that all future interest will be calculated on. A modest additional payment in year two can save years of interest, and it is the single best return available to most homeowners.
On a ₦30 million loan at 20 percent over twenty years, an early monthly payment might be ₦480,000 of interest and ₦20,000 of principal. Four years in, you have paid a great deal and the balance has barely moved. Nobody misled you.
Questions people ask
Why is my loan balance barely falling?
Because early payments are mostly interest. Interest is charged on the outstanding balance, which is largest at the beginning.
Should I make extra payments?
Where there is no early repayment penalty, yes, and early ones are worth far more than later ones. Confirm the penalty position first.
What is an amortisation schedule?
A table showing exactly how each payment is split between interest and principal across the whole loan. Ask for it, and read it.
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