Morty is a pet project i been working on here and there which spills out an amortization schedule for you, based on your loan attributes. I’ve been incubating it at Heroku since it is quite a fascinating concept and tool. Their online console is pretty geeky but easy to use and deploying rails apps is straightforward really. Anyhow…. Morty.
Say you considering a loan for (in any currency) $150000 at an annual interest rate of 12%, compounded monthly over 5 years (or 60 compounding periods). Immediately you get an idea of how much your repayments are going to be.
In this case, 3336.67 per month. The schedule part is the interesting bit; if you are indeed interested. First, you can see, at a glance, how your equity in the loan grows and how quickly (slowly) the loan capital is repaid over time.
As you can see, it’s only just after halfway that you start to owe less than you’ve repaid. You will notice slight curves due to the nature of amortization. Experiment with bigger loans and interest rates to see just how the curve is affected.
You can also see how much total interest you end up paying, versus how much of the interest you’ve paid off so far.
Here, the curves are slightly more pronounced. Of the ±50k interest you’re going to pay back in total, most of it is paid off quite early. Which makes sense. The more you owe in the beginning, the more interest you pay. So if you really want to make a difference on the interest on your loan, over time, make the biggest impact you can as early on as possible. You can see that towards the end of the loan, how flat the curve is. If you start making advanced payments at this stage, you’ll still save, but not nearly as much as you could have if you were even one or two months earlier with that payment…
The schedule…
Numbers number numbers. All it is is numbers. The numbers tell you that when you make your first payment of R3336.67, almost half of that payment is paying back the interest. R1500, in this case. So, in effect, you’ve only paid back R1836.67 of the capital (R150k) back after actually paying R3336.67. That starting to make sense now? Sucks, eh? So you make another payment, through enforced religiosity (ie. debit order). This time, you’re _only_ paying back R1481 interest. The balance pays off the capital. And so it goes until eventually you reach a stage where you’re paying off more capital than interest with each payment.
Now take a look at your home loan. An average value in current property markets might be something like R800k at 14% over 20 years (or 240 compounding periods). You’re paying back almost R10k every month but your first 42 payments don’t even dent the capital by more than R1000 at a time. Effectively, after 3.5 years, you’ve paid over R420k back, but still have R767k out of the original R800k owing.
Eish. That’s why credit is so expensive and not everybody can afford to jump into the property game.
Which also brings me to another point… a parting shot, if you like. Think _very_ carefully about the impact of renegotiating your outstanding debt. Imagine: 3.5 years later, and almost half a million out of pocket, you get a generous offer an opportunity to renegotiate your existing debt. In essence, you start all over again. Remember the curve! Another 3.5 years later, another R400k out of pocket, and you’ve only managed to claw back R35k, give or take. Sound like a smart move?
**NOTE: Different institutions structure fees into their loans, so the actual repayments may vary if you ask them for quotes and compare to this calculator. Query the fees. Always.