Amortizing loan
The most common loan form: each installment repays part interest and part principal, so the outstanding balance falls steadily to zero. Early on, interest dominates the payment; later the balance reverses. The amortization schedule sets out this split installment by installment.
Key points
- Each installment includes an interest portion and a principal portion, the ratio of which changes over time.
- The amortization schedule shows the outstanding balance at every point.
- Early in the loan, the interest portion dominates; it progressively reverses.
- Early partial or full repayment is possible, subject to any prepayment charges.
Frequently asked questions
How does a mortgage amortization schedule work in practice?
The amortization schedule lists each loan installment with its breakdown: interest calculated on the outstanding balance, principal repaid, insurance if applicable, and balance remaining after payment. This document lets the borrower know exactly how much they owe at any time and plan an early repayment. The broker uses this schedule to compare multiple offers on their true cost.
What is the difference between a fixed-rate and a variable-rate amortizing loan?
In a fixed-rate amortizing loan, the rate and installments remain constant throughout: predictability is total but one does not benefit from rate falls. In a variable-rate loan, the rate is indexed to a market rate and can move up or down, changing the installment or the term. Capped loans (variable rate with floor and ceiling) offer a compromise between the two.
What mistakes should be avoided when making an early repayment on an amortizing loan?
The first mistake is not checking the early repayment charges (IRA) in the contract: in some cases they can make the transaction unfavorable. The second is making an early repayment without considering whether the available sum might be better invested elsewhere, depending on the yield differential. Finally, one should ensure that a partial early repayment translates into a term reduction (rather than a payment reduction) to maximize interest savings.
In practice
On a €200,000 amortizing loan over 20 years at a fixed rate, the amortization schedule shows that after 5 years the borrower has repaid around 30% of total interest but only 15% of principal: this early imbalance explains why early repayment at the start of the loan is far more effective than at the end.
Official sources
- FISE model (annex art. R313-8): amortizing / in fine loan · Légifrance — Code de la consommation
- Obtaining a mortgage loan · Service-Public.gouv.fr
- Mortgage credit (official guide) · Service-Public.gouv.fr