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# Home Loan Amortisation Analysis

Download our example of a home loan amortization table [ Microsoft Excel .xls file 128KB ]

The principle of home loan amortization is simple - a constant home loan repayment is applied over the bond term to reduce the outstanding capital balance to nil. The home loan repayment amount consists of an interest portion and a capital repayment portion. The interest portion is greater at the beginning of the bond period when the outstanding capital balance is at its highest and gradually reduces as the outstanding capital is repaid. The bond repayment amount is calculated by applying a factor to the original outstanding bond amount. Although the bond repayment is usually calculated by using a financial function (PMT function), it is the result of a mathematical equation that is calculated based on the appropriate interest rate and bond period. The equation is as follows:

PMT = PV x ( r / [ 1 - { 1 / ( 1 + r )^n } ] )

where PMT = bond repayment amount; PV = original bond amount; r = interest rate; n = bond period.

This equation is essentially used to calculate a constant bond repayment amount that is repaid in instalments over the entire bond period and includes the interest that is charged on the outstanding capital balance. The effect of this equation is however not as straight forward. There is a common perception amongst home owners that capital repayments are a lot more proportionate than they actually are. Some home owners fall victim to this erroneous thinking and are quite often surprised at how little capital has been repaid after a number of years have elapsed. This is best illustrated by an example:

Let's assume that a R1 million home loan is repaid at an interest rate of prime less 2% over a period of 20 years and that the bond is granted in January 2001. Our calculations will be based on the prime interest rates that were in effect from January 2001 to March 2016. Download the Microsoft Excel based example that is included at the top of the page for the detailed calculations that are used in this example (the full version of this bond amortisation table template is included in our template subscription). The following table includes a summary of the outstanding bond balances at the end of the appropriate annual periods:

Year
1
5
10
15
Outstanding Balance
986,667.89
906,471.04
736,995.12
432,023.12
% Outstanding
98.7%
90.6%
73.7%
43.2%

After the first year, 98.70% of the original bond amount is still outstanding even though the total bond repayments for the year amounted to R129,967. The total capital repayments for the first year amounted to only R13,332 which means that the interest charged and repaid during the first year amounted to R116,635! The interest portion of the bond repayment gradually reduces over the bond period as the outstanding capital is repaid but the percentage capital that is still outstanding at various stages in the bond period may still be surprising to some home owners. After 10 years of bond repayments, the capital that has been repaid is not nearly half of the original outstanding balance (as may be expected) and in our example, 73.7% of the bond is still outstanding at this point. It may also be surprising that more than 40% of the original bond amount is still outstanding after 15 years of repayment!

This is the nature of home loan amortisation and it is actually quite shocking that many home owners are surprised by these calculations. The calculations in our example are based on standard amortization principles and significant interest savings can be realised by making additional bond repayments - especially early on in the bond period when the outstanding capital balance is at its highest and a significant portion of the bond period still remains.

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