Mortgage Repayments- Capital Repaid By Year
Repayment Mortgages - How Much The Loan is Reduced By Each Year?
Oct 20, 2009
When a payment of $1,000 is made on a mortgage each month, the amount owed does not reduce by $1,000. Some of the repayment is used to pay interest. This article shows how much capital and interest is repaid on a 25-year mortgage, for a range of interest rates.
Interest and Capital Repayments
The important factors in deciding how much the loan reduces by each month are the interest rate, the loan period, and how far the borrower is into the loan period. At the beginning of the loan period, more of the repayment is used to pay interest, but as time goes on and the loan balance reduces, more and more of the payment is used to pay off the capital. The very last payment is almost all capital.
Mortgage Repayment Graph
The graph (Fig. 1) shows how much capital is repaid over the period of a 25-year mortgage. The graph shows nine different lines, one for each of the interest rates from 0% to 8%. When the interest rate is 0%, then as expected the payment reduces the balance by that amount. As interest rates go up, the proportion of the repayment used to reduce the loan balance decrease for a given month. This graph may be used as a rough guide.
Mortgage Repayment Table
The table (Fig. 2) shows the same information the graph in Figure 1. It is easier to use because the numbers are visible, but the numbers shown are for the last month of the year shown. For example, to find what percentage of the repayment is used to pay capital for a 3% mortgage at the end of year 7, the table value shows 58.2%. So for a $1,000 repayment, $582 is paid off the capital, and the rest ($1,000 - $582 = $418) is interest.
Mortgage Repayment Coefficients
Figure 3 shows a table of coefficients that may be used to calculate the repayment percentage for any month. For a given rate of interest, there are three coefficients, entitled X^2, X and Constant. X is the month number e.g. Month number 30 is two and a half years into the mortgage. The steps to find out the repayment percentage for the 30th payment of a 4% loan are:
- Decide which month number, X. (30 in this case)
- Choose the interest rate (4% in this case)
- Look up the number under the column X^2. (0.00000342)
- Multiply that number by X and multiply by X again (0.0000342 x 30 x 30 = 0.003078)
- Look up the number for 4% under column X (0.00104)
- Multiply this by X (30 x 0.00104 = 0.03117)
- Look up the constant value for 4% (0.372)
- Add the three components together (0.372 + 0.03117 + 0.003078 = 0.406)
So the repayment percentage is 40.6%.
Summary of Capital Repayment Percentage
As interest rates and the loan period increase, the amount of repayment spent on servicing the loan interest goes up. As each payment is made, a higher portion of the payment is used to pay off the capital, or loan amount. Three methods are described to estimate the amount by which the loan reduces. A basic explanation of how to calculate mortgage repayments can be found at "Mortgage Repayments- How Much Comes Off The Loan" and "Get an Instant Mortgage Calculator For Free." The term of a mortgage may be reduced by making overpayments, especially early in the term.
This article is intended to explain general principles and give guidance as to how mortgage payments are used. It is not a substitute for professional advice. The numbers used are a guide only, as individual mortgage contracts may differ. Many mortgage providers offer free online mortgage calculators.
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