Why Amortization is Important

Please note that I have not converted currency to dollars in this post as I didn’t deem it necessary, given that the fundamental concepts still apply.

Today’s topic for discussion is Amortization – in the Mortgage sense of the word. In Mortgage terms, it is essentially a fancy term that people use to discuss how much equity you -Vs- how much you owe over time.

While your mortgage is worked out over a fixed period of time and is calculated to have equal monthly installments; these will equate to less interest and more equity every month. Let me explain….

If I owe 100,000 and pay 5% interest a year, this equates to 5000 interest on the total amount. This is worked out at a monthly rate – i.e. 5%/12. However, because I am making repayments of 2000 a month, this is partly repaying equity, hence the next month I will no longer owe 100,000 and wouldn’t have to pay as much interest – hence although my repayment stays the same, a larger portion is paying of equity.

A lot of people can’t get their head around this, but it seems so simple when you do! After gaining a proper understanding of this concept, the significance of over-payments on your mortgage becomes apparent. Without explaining any further, consider the table at the end of the post. This refers to the mortgage that we have recently taken out.
Note I have simplified my spreadsheet to highlight the important parts. If there is interest I will upload the full document.

The ‘Standard Equity’ column details the amount we own of the house worked out on a 25 year loan period (interest rate 4.19%), while the ‘New Equity’ details the amount we own with over-payments. I have calculated this based on an overpayment of £400 each month. This is roughly £100 per week – not a hugely significant amount on a weekly basis.

This is where it gets very interesting – by increasing our monthly payments by £400, we knock 10 YEARS off the duration of the mortgage!! Wow! Not only that, but we save a little under 50K in interest charges!

Even if you couldn’t afford to reduce your mortgage by 400 a month, an increase in only 50 per month would knock 2 years off and save over 10K!!!

Check out the Calculator Here – This will work for any currency.

Two more incentives for paying off our mortgage early:

• Interest Rates are very likely to increase. Our mortgage is fixed at 4.19% for 2 years – The sooner we can pay it off the better!
• The breakdown will encourage us to continue to make over-payments with any extra money that we make. I will commit right now that if I ever make money from this blog that 90% will go to over-payments!
• The more equity we can get in the house, the sooner we can buy a second property for letting purposes
• The potential not to owe any money to anyone long before we hit 40. This gets us one step closer to starting our dive school! 🙂

Homeowners – work out how much you could save, commit to an amount and JUST DO IT!

Question Time: Does anyone make regular over-payments? How long have you been doing this for and how much have you saved?

Years	Amount Owed	Standard Equity	Amount Owed With Over-payments	New Equity
0	179,000		0
1	174,857	4,143	169,946	9,054
2	170,536	8,464	160,506	18,494
3	166,031	12,969	150,662	28,338
4	161,334	17,666	140,398	38,602
5	156,436	22,564	129,696	49,304
6	151,329	27,671	118,536	60,464
7	146,004	32,996	106,899	72,101
8	140,451	38,549	94,766	84,234
9	134,661	44,339	82,114	96,886
10	128,624	50,376	68,922	110,078
11	122,329	56,671	55,167	123,833
12	115,765	63,235	40,824	138,176
13	108,920	70,080	25,868	153,132
14	101,783	77,217	10,273	168,727
15	94,342	84,658	0	179,000
16	86,582	92,418
17	78,492	100,508
18	70,055	108,945
19	61,258	117,742
20	52,086	126,914
21	42,521	136,479
22	32,548	146,452
23	22,149	156,851
24	11,306	167,694
25	0	179,000