How loan amortisation works

A fixed-rate loan has a constant payment, but what that payment buys changes every single month.

The formula in words

Each month the lender charges interest on whatever balance is outstanding, then applies the rest of your payment to reducing that balance. Early on, the balance is large, so interest eats most of the payment. Later, the balance is small, so almost all of the payment is principal. The payment itself never changes.

A worked example

A $250,000 mortgage at 6% for 30 years costs $1,498.88 a month. In month one, interest is $1,250 and principal only $248.88. By the final year the interest portion is under $30 and almost the whole payment is principal. Over the life of the loan you pay about $289,595 in interest — more than the amount borrowed.

Why extra payments help so much

An extra payment goes entirely to principal, which removes all the future interest that principal would have generated. That compounding effect is why a modest extra monthly amount can cut years off a mortgage; the amortisation calculator shows the schedule month by month.

Using the calculators here

Start with the loan or mortgage payment calculator for the headline number, then open the amortisation calculator to see the split over time. Compare two offers with the same loan amount and term: the difference in total interest is usually far larger than the difference in monthly payment suggests.