Definition
Amortization
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Amortization refers to the repayment towards the principal balance from monthly installment payments.
From a typical home loan with scheduled mortgage payments, the monthly payment minus the amount paid towards interest due would be the amortization.
For example, if a monthly payment is $1,000 and $400 go towards repayment of interest, then $600 ($1,000 – $400) is the amortization that goes towards principal reduction.
In the unique event that interest due is more than the monthly payment, the the excess will be added to the principal. Creating a situation of negative amortization.
When explaining the terms of a home loan to borrowers, lenders usually provide an amortization schedule to elaborate how payments are structured over the life of the loan.
This is usually in a table format, sometimes in graph format.
This amortization schedule would show how much of interest and principal would have been repaid at any point in future.
However, borrower must be mindful that these tables are forecasts.
As Singapore housing loans are usually converted to a floating rate loan in the long term, adjusted interest rates would inevitably affect the accuracy of the amortization table.
Mortgages in Singapore are usually fully amortizing.
This means that if a loan has a tenure of 25 years, at the end of 25 years, the principal would be fully repaid if the borrower has been keeping up with monthly payments.
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