Loan amortisation is the gradual repayment of borrowed money through payments that reduce the principal, or amount owed. On a principal-and-interest loan, each repayment covers interest and pays down some principal. Early repayments often contain more interest because the outstanding balance is larger.
An amortisation schedule shows that split over time. Its figures depend on the rate and repayment rules, so a schedule changes when those assumptions change.
What Loan Amortisation Means
Loan amortisation means reducing a debt over its repayment term. Interest is the cost of borrowing. Paying interest alone leaves the principal unchanged, assuming there are no other charges or transactions.
For example, a $600 repayment containing $500 of interest reduces principal by $100. The full $600 leaves your bank account, but only $100 pays down the debt.
With a constant rate and regular equal repayments, falling principal means less interest in each later period. More of the same repayment then reduces the balance. A variable-rate mortgage can have changing repayments, and an interest-only period does not repay principal through its required interest payments.
Here, amortisation concerns loans. Accounting amortisation spreads the cost of an intangible asset over its useful life and is a separate concept.
Read a Loan Amortisation Schedule
Read each row by subtracting interest from the repayment to find principal repaid, then subtracting that principal from the opening balance.
This hypothetical loan starts at $100,000, runs for 30 years and has a constant annual interest rate of 6%. Payments occur monthly at period end. For this simplified model, monthly interest equals the opening balance multiplied by 6% divided by 12. There are no fees, offset funds or extra repayments.
For equal end-of-month repayments, the loan amortisation formula is A = P * r / (1 - (1 + r)^(-n)). Here, A is the repayment, P is the opening principal, r is the monthly rate as a decimal and n is the number of payments. The asterisk means multiplication and the caret means raising to a power. This example uses P = 100,000, r = 0.06 / 12 and n = 360, giving A = $599.55 rounded.
When the rate is zero, divide principal by the number of payments instead. The Reserve Bank’s amortisation derivation explains the relationship between scheduled payments and the declining loan balance.
| Month | Opening balance | Repayment | Interest | Principal repaid | Closing balance |
|---|---|---|---|---|---|
| 1 | $100,000.00 | $599.55 | $500.00 | $99.55 | $99,900.45 |
| 2 | $99,900.45 | $599.55 | $499.50 | $100.05 | $99,800.40 |
| 3 | $99,800.40 | $599.55 | $499.00 | $100.55 | $99,699.85 |
The calculation retains unrounded values internally and rounds displayed amounts to cents. The final payment adjusts for any remaining balance. Most Australian home loans calculate interest daily, as Moneysmart explains, so an actual lender schedule also reflects payment dates and days in each period.
In the first row, $599.55 minus $500.00 leaves $99.55 of principal repaid. In the next row, interest falls because the opening balance is lower. A small principal reduction early in the loan follows from the arithmetic.
The table makes the changing interest and principal amounts visible row by row. On a graph, time goes along the horizontal axis. Separate interest and principal series show interest falling as principal repayments grow under these constant-rate assumptions.
An amortisation statement or schedule projects repayments using stated assumptions. Your lender’s account ledger records actual transactions and charges. Reconcile a projection against that ledger using actual payment timing and rate changes, including any fees or offset benefit.
Compare Terms, Rates and Repayment Changes
A shorter term raises the regular repayment and reduces total interest when the loan amount and rate stay the same. A higher rate raises the repayment needed to clear the same balance within the same term.
The following hypothetical comparisons use the same $100,000 starting balance and monthly interest method. Each rate stays constant for the entire term, with no fees or extra payments. Monthly repayments are rounded to cents for display and total interest to whole dollars.
| Annual rate | Term | Monthly repayment | Total interest |
|---|---|---|---|
| 6% | 30 years | $599.55 | $115,838 |
| 6% | 25 years | $644.30 | $93,290 |
| 7% | 30 years | $665.30 | $139,509 |
The 25-year option requires about $45 more each month than the 30-year option at 6%. It saves about $22,548 in interest under these assumptions.
A schedule is a projection, not a promise that repayments stay fixed. CommBank's repayment guidance explains that repayments can change after a rate change, a large redraw or the end of a fixed-rate period.
After an interest-only period, the unpaid principal must be repaid over the time left in the loan. For example, five interest-only years within a 30-year term leave 25 years for principal-and-interest repayments. Moneysmart's interest-only guide explains the resulting repayment increase.
Refinancing creates a new schedule using the new balance, rate and term. Restarting a longer term can lower repayments while extending the time you pay interest. Compare a refinance over both the remaining original term and the proposed new term. Use the mortgage calculator to model your own repayment assumptions.
Understand Extra Payments, Offset and Redraw
An extra repayment reduces the loan principal when it is credited to the loan. An offset balance remains in a separate linked account and reduces the balance used to calculate interest.
For example, paying $10,000 into a $100,000 loan reduces the loan balance to $90,000. Holding $10,000 in a linked 100% offset leaves the loan balance at $100,000, with interest calculated on $90,000 while that money remains there.
To model extra repayments, enter their amounts and timing. To model an offset, enter the expected daily offset balance and the product's offset percentage. If repayments remain unchanged, lower interest leaves more of each payment available to reduce principal.
Redraw allows access to eligible extra repayments under the loan's rules. Withdrawing those funds increases the balance again and changes future interest. Moneysmart distinguishes offset from redraw and explains the access rules and costs to compare.
Fixed-rate loans can restrict extra repayments. For example, CommBank's fixed-rate terms allow up to $10,000 in additional payments per fixed-loan year without an Early Repayment Adjustment or administrative fee, excluding Interest in Advance terms. That year starts when the fixed term begins. Additional payments are unavailable through redraw until the fixed term expires. Other products have their own limits, so use the allowance and break-cost rules that apply to the loan you are modelling.
Fortnightly savings also depend on the amount paid. Paying half a monthly repayment every fortnight produces 26 half-payments, equivalent to 13 monthly payments across 26 fortnights. That adds a monthly payment compared with 12 monthly payments.
A lender-calculated fortnightly repayment can use a different method. An amount calculated as monthly repayment multiplied by 12 and divided by 26 preserves the annual repayment total. Earlier payment timing can still affect daily interest, but the extra monthly payment does not arise from frequency alone.
Before comparing schedules, match the actual repayment amount and frequency, then include any offset balance and planned withdrawals. Use the same assumptions in both schedules so the difference reflects the choice you are considering.
