Mortgage Amortisation Schedule Explained

As a mortgage holder, paying off your home loan may be a top priority to help you build the value of your asset and free up cash for other uses.

An amortisation schedule shows the series of repayments required to pay your home loan in full within the agreed-upon time frame you set with your home loan lender. The amortisation schedule shows how much each payment will be and how much principal and interest you will pay each time and in total.

Understanding amortisation, how it’s calculated, and your schedule of payments can help you see how contributing more than the minimum repayments whenever possible, even by a small amount, can make a big difference in how much interest you pay over the life of the mortgage and how much sooner the loan will be paid in full.

What is a typical mortgage amortisation schedule?

Amortisation describes the process of spreading the cost of purchasing an asset — usually a large one like a home — over time. In a mortgage context, amortisation is the method used by lenders to calculate your home loan repayment plan in regular fixed increments until it is repaid in full, including interest.

Paying a mortgage in fortnightly or monthly increments for up to 30 years is typical. The amortisation schedule for a 30-year mortgage with monthly repayments will show the amount for each of the 360 payments and how much of the principal and interest will be paid each month, and in total, at the end of 30 years.

Principal and interest are the two main components of the repayments on an amortising loan. The principal is the amount outstanding on the loan, while the interest is an agreed-upon rate you pay the lender annually on top of the principal. That interest rate is either fixed for up to a few years at the start of the mortgage or is variable, moving in line with the cash rate. The interest portion of the loan is always charged as a percentage of the remaining balance.

Your amortisation schedule determines how much of your monthly payment goes towards principal and interest. Almost all mortgages have fully amortising payments, meaning the mortgage will be paid out in full by the end of its term, and if you sell a property with an amount still owing, say $100,000, that amount is taken out of the sale price.

The amortisation schedule will show that most repayments go towards paying interest for the first five years of a mortgage. But over time, the payments start to eat into the principal, and the outstanding loan amount comes down more quickly. Your regular repayments remain consistent despite the redirection in where the money is credited. This process is also referred to as straight-line amortisation.

This means that, while your loan repayment stays the same each month unless the terms and conditions of the loan change, you pay more towards principal and less towards interest with each passing repayment.

Calculating home loan amortisation

Calculating a fully-amortising mortgage payment requires knowing the full loan amount, the term of the loan and your interest rate.

Entering these details into a mortgage amortisation calculator can be a highly useful exercise when starting out on your mortgage journey because it can provide you with valuable insights on:

The total amount you will pay over the course of your mortgage
The amount of interest you’ll pay over the mortgage term
How making extra payments affects the term of the mortgage
The amount of money you can save by making extra repayment amounts.

If, for example, you took out a loan of $500,000 over a 20-year term with an interest rate of 5.89%, a mortgage amortisation calculator would show the fully amortising payment (the amount required to repay the loan in full over time) is $3560 per month (assuming you’re also paying a $10 monthly fee). It would show the total loan repayment amount is $854,520, meaning the total interest charged over the course of the loan is $352,120. With this example, you’d see the interest due over the first 12 months is $29,450 ($500,000 x 5.89%).

How do repayments affect the amortisation schedule?

When your lender receives each repayment, they will subtract the interest portion due and take it for themselves. What’s remaining is then subtracted from the principal due. The amortisation schedule shows that with each passing repayment, more money, if only a fraction, is coming off the amount still owing on the loan. As the process repeats over the term of the mortgage, more of the principal is paid off, and less interest is paid with each payment.

So in the previous example, let’s say that, with your first mortgage payment, you only pay down the principal by $30 because the rest goes towards interest. That means the amount owing on the mortgage is now reduced to $499,970, and the interest for the next repayment is then calculated based on the updated amount owing — the remaining principal.

Paying off more than you are required means every extra dollar comes off the principal, which can have a huge impact down the track. So using the above example where you borrowed $500,000 over 20 years with a monthly repayment of $3560, if you paid an extra $100 a month ($3660), the term of the mortgage is reduced to 19 years, and the total loan amount owing is $834,122, saving $20,000 in interest.

If, however, you upped that repayment to $3760 a month, or $200 more than the minimum repayment required, the term is further reduced to just 18 years and two months, and the final repayment amount is $815,996, representing a saving of nearly $40,000. From an amortisation perspective, the final loan repayment is less because these extra repayments have eaten into the principal and further reduced the interest component of the loan.