Mortgage Amortization Plan: what to keep in mind
The loan amortization plan consists of the division and calculation of the installments that lead to the repayment of the loan covered by the mortgage. It can be easily determined if you know the simple mechanisms that regulate it. Certain factors must be taken into consideration, such as the principal amount, the loan amount, the residual principal for each month, the installment amount and the interest applied.
In fact, the installment is made up of interest and principal and the amount of the two fractions varies according to the type of amortization applied. There are various types of depreciation plans, each of which has different characteristics and calculation methods. In this way it is possible to determine which is the best solution for your needs and the most convenient from an economic point of view.
How to calculate the Mortgage Amortization Plan
To calculate the amortization plans, it is necessary to consider the amount of interest accrued in the period to which the installment refers and the fact that the sum of the principal portions of the installments must be equal to the entire loan granted by the bank originally.
In most cases, reference is made to the French amortization plan with constant installments. This is the simplest and easiest solution to calculate because monthly repayments are all the same except in situations where rate changes occur.
Precisely because of its characteristics, the amount of the interest portion tends to decrease up to zero as we approach the natural expiration of the mortgage. In fact, this value is calculated on the amount of the residual debt. Instead, the principal portion of the installment grows over time to keep the monthly repayment amount constant.
Consequently, it is convenient to pay off the loan before its natural expiry date in the first period following the subscription. On the contrary, there are very few advantages in closing the loan shortly before its termination because penalties are provided to compensate the bank for non-payment of interest.
How to calculate the mortgage amortization schedule after the rate change
The characteristics of the French amortization plan allow a quick and easy calculation when the loan adopted is at a fixed rate. In the event that the mortgage is regulated at a variable rate, there are changes every time the Good lender bank value changes.
The most correct solution from a logical point of view is to abandon the old amortization plan and calculate a new one by referring only to the period of time remaining before the natural conclusion of the mortgage. This is a more linear criterion from a mathematical point of view, however not all banks decide to apply it.
In fact, some credit institutions and financial companies opt to continue to apply the original amortization plan of the loan and follow the old methods provided for the repayment of the capital. The first solution theoretically consists in extinguishing, at the moment of the rate change, the loan to immediately open a new loan by applying the different interest rate.
However, the banks that make this possibility available to customers make it possible to avoid the penalties that are traditionally associated with the early closing of a mortgage. Some aspects must be taken into consideration to verify which is the most convenient management method:
- banks prefer to keep the original amortization plan for the duration of the loan because it guarantees an easier and faster procedure than the alternative solution. In fact, the banking institution does not have to update and modify the amortization plan at every rate change;
- always keeping the original amortization plan, the mortgage holder knows from the outset what the costs for the early repayment of the loan will be at each due date;
- the change in the rate applied involves changes in the amount of the installment, which will no longer have a constant amount for the entire duration of the loan. The loss of the criterion of constancy can lead to a disorientation of the customer and questions the main characteristic that made the French amortization plan so convenient. In fact, even during periods of rate stability, the amount of the new installment will tend to rise or fall.
Online tools available
To calculate the mortgage amortization plan, several online tools are available that allow you to quickly and easily determine the amount of the repayment installments. Consequently, it is possible to plan down to the smallest details the best method and solution for repaying the installment loan.
Mortgage Amortization Plan: advances 2019
For 2019 there are several changes regarding the calculation of the mortgage amortization plan, the most important of which concerns the replacement of the Good lender bank value with a new index. Consequently, not only will the interbank loan rate no longer be used, but the variable rate applied to mortgages will also undergo significant changes and will be calculated differently.
To overcome the fact that the different banks use numerous variable rates according to their needs, it has become necessary to rationalize this sector. The new Good lender bank index will be based in part on the costs of money related to market transactions, but other elements will be taken into consideration to ensure greater stability and transparency.
The hybrid system therefore makes it possible to limit Good lender bank ‘s exposure to financial fluctuations. According to the latest rumors, the algorithms for calculating the index will be ready at the end of 2018, but the effective entry into force of the new management method will take place in a couple of years to guarantee a transition period.
Furthermore, the variable rates applied to mortgages will have a greater fluctuation because they will no longer depend exclusively on the decisions of the banks. This fact leads some analysts to expect a rate hike that will make variable rate mortgages more expensive.