If we have mortgage financing, it is common for us to sometimes have doubts about how the amortization fee of our mortgage is calculated. That is why, in this article, we will explain how the mortgage amortization fee is made up. According to the French amortization system, which is usually the most used?
We will see the corresponding separation in interest and capital of the mortgage amortization fee and the evolution over the years using an amortization table as a real example.
The first thing you should keep in mind is to find the best mortgage that suits your wishes. Do not go to contract a mortgage that in the long term ends up harming you.
Calculate the repayment installment: What is the French loan?
To calculate the mortgage repayment installment we have several tools, such as the Rankia mortgage simulator, but sometimes it is better to take out paper and pencil and start calculating them yourself, or do it using Excel. In addition, the bank must give us a representative example of what our amortization fee would be like, but if you want to be proactive or go ahead and do your own accounts, or simply want to better understand all this data, let’s see the concepts with a practical example.
The French amortization system is the most used system to calculate the amortization fee of mortgages. The French loan has this appellation due to the form of repayment, which consists of a constant month-to-month installment, in which what varies is the composition of the amortization part of capital and interest.
Mortgage amortization fee = Interest + Amortization of capital
The mortgage amortization fee is divided into:
- Interests. It is the part with which we remunerate the bank for the mortgage loan.
- Amortization of capital. It is the part of the fee that is used to return the money that they have lent us.
In addition, the French amortization system is characterized by the fact that during the first years we will pay more interest than capital amortization, we will see this later with the example. If you want more information about the French amortization system, you can consult it in this article.
How to calculate the interest and amortization of the capital in each mortgage installment?
To calculate the composition of the mortgage amortization fee, we must first be clear about the concept of outstanding capital. What is outstanding capital? The word says it, but it is the capital that we still have to pay on the mortgage. Each month this capital is less. The outstanding capital only decreases by subtracting the part of the installment that corresponds to the amortization, but this will be seen much better with the example.
Interest is calculated as:
Interest = (Principal pending * interest rate)/12
Meanwhile, the amortization of each installment is calculated as:
Amortization per installment = Installment – Interest per installment
How to calculate the mortgage amortization fee: example
With an example everything is always much clearer, we are going to see how the amortization fee is calculated for a hypothetical variable-rate mortgage.
Characteristics of the mortgage
We are going to take the characteristics of the Variable Pibank mortgage as an example, and we will calculate the amortization rate for the first two years, so we can see how the fee for this type of mortgage changes between the first year, where we have an interest rate fixed, and the second year, where the quota will be referenced to the Euribor. The example data is as follows:
- Mortgage loan: €125,000
- Term: 25 years, equivalent to 300 months
- No opening fees
- First year interest rate: 1.89%
- Annual review of the applicable Euribor
- Mortgage constitution date: October 1, 2021
- Euribor to be applied at the end of it: Euribor + 1.08%. In this case we have used the provisional average of the Euribor for the month of August, which stands at -0.498% today
- There are no insurance payments included in the mortgage amortization fee, since the Pibank variable mortgage does not have any type of link. We will have to take into account that it is mandatory to contract home insurance, but not through the entity with which we contract the mortgage.
Why calculate the mortgage amortization fee yourself?
If you calculate the mortgage amortization fee yourself, you will clearly see what you are going to pay and for what and how your debt is being reduced.
In addition, in Excel you can vary and, if you take out a variable-rate mortgage, play with the Euribor forecasts to see how your installment would be, not to mention comparing what the rise in the differential will affect us if we stop taking out one or several insurances, or other combined products.