Welcome back to #FinanceFriday as we continue with our focus on Managing debt.
Let’s jump straight into this week’s presentation as we continue with housing loans….
As mentioned last week, the reduction of interest cost to a consumer is generally seen as impossible because it is believed that the only way this can happen is if the monthly loan payment is doubled. Like I said, nothing could be further from the truth! How so you ask? Well, one of the first things you should ask your loans officer for, once your loan has been finalized, is a copy of your amortization schedule.
An amortization schedule is a table which shows how each payment made to your loan will be allocated between the principal and the interest on a given day. Usually, the schedule shows the payments on a fixed day of the month. If your payments are not made on the same day of each month, the amortization schedule can serve as a guide to you, since there will be some variance in the amount applied to both principal and interest. Below is an extract of an amortization schedule for the 20 year mortgage we spoke about last week. For the sake of space, it shows the payments at different intervals during the life of the loan.
Notice that a significant portion of the payment is applied to the interest during the first period (purple). This continues for about 6 years (2023) before the amounts even out, and in about year 10 (green colour block-half of the life of the loan) the allocation resembles that of the first 6 years, with a bigger portion being applied to principal. In the last year, (blue section) the interest payment is under $100.00 and the majority is applied to the principal of the loan.
| Enter Values | ||||||
| Loan Amount | $250,000.00 | |||||
| Annual Interest Rate | 5.00% | |||||
| Loan Period in Years | 19.99769856 | |||||
| Start Date of Loan | 28/02/2017 | |||||
| Monthly Payment | $1,650.00 | |||||
| Number of Payments | 239.9723827 | |||||
| Total Interest | $145,954.43 | |||||
| Total Cost of Loan | $395,954.43 | |||||
| No. | Payment Date | Beginning Balance | Payment | Principal | Interest | Ending Balance |
| 1 | 28/03/2017 | $ 250,000.00 | $ 1,650.00 | $ 608.33 | $ 1,041.67 | $ 249,391.67 |
| 2 | 28/04/2017 | 249,391.67 | 1,650.00 | 610.87 | 1,039.13 | 248,780.80 |
| 3 | 28/05/2017 | 248,780.80 | 1,650.00 | 613.41 | 1,036.59 | 248,167.39 |
| 4 | 28/06/2017 | 248,167.39 | 1,650.00 | 615.97 | 1,034.03 | 247,551.42 |
| 5 | 28/07/2017 | 247,551.42 | 1,650.00 | 618.54 | 1,031.46 | 246,932.88 |
| 6 | 28/08/2017 | 246,932.88 | 1,650.00 | 621.11 | 1,028.89 | 246,311.77 |
| 7 | 28/09/2017 | 246,311.77 | 1,650.00 | 623.70 | 1,026.30 | 245,688.07 |
| 8 | 28/10/2017 | 245,688.07 | 1,650.00 | 626.30 | 1,023.70 | 245,061.77 |
| 9 | 28/11/2017 | 245,061.77 | 1,650.00 | 628.91 | 1,021.09 | 244,432.86 |
| 10 | 28/12/2017 | 244,432.86 | 1,650.00 | 631.53 | 1,018.47 | 243,801.33 |
| 11 | 28/01/2018 | 243,801.33 | 1,650.00 | 634.16 | 1,015.84 | 243,167.17 |
| 12 | 28/02/2018 | 243,167.17 | 1,650.00 | 636.80 | 1,013.20 | 242,530.36 |
| 75 | 28/05/2023 | 197,398.69 | 1,650.00 | 827.51 | 822.49 | 196,571.18 |
| 76 | 28/06/2023 | 196,571.18 | 1,650.00 | 830.95 | 819.05 | 195,740.23 |
| 77 | 28/07/2023 | 195,740.23 | 1,650.00 | 834.42 | 815.58 | 194,905.81 |
| 78 | 28/08/2023 | 194,905.81 | 1,650.00 | 837.89 | 812.11 | 194,067.92 |
| 79 | 28/09/2023 | 194,067.92 | 1,650.00 | 841.38 | 808.62 | 193,226.54 |
| 80 | 28/10/2023 | 193,226.54 | 1,650.00 | 844.89 | 805.11 | 192,381.65 |
| 81 | 28/11/2023 | 192,381.65 | 1,650.00 | 848.41 | 801.59 | 191,533.24 |
| 82 | 28/12/2023 | 191,533.24 | 1,650.00 | 851.94 | 798.06 | 190,681.29 |
| 83 | 28/01/2024 | 190,681.29 | 1,650.00 | 855.49 | 794.51 | 189,825.80 |
| 84 | 28/02/2024 | 189,825.80 | 1,650.00 | 859.06 | 790.94 | 188,966.74 |
| 85 | 28/03/2024 | 188,966.74 | 1,650.00 | 862.64 | 787.36 | 188,104.10 |
| 121 | 28/03/2027 | 155,536.62 | 1,650.00 | 1,001.93 | 648.07 | 154,534.68 |
| 122 | 28/04/2027 | 154,534.68 | 1,650.00 | 1,006.11 | 643.89 | 153,528.58 |
| 123 | 28/05/2027 | 153,528.58 | 1,650.00 | 1,010.30 | 639.70 | 152,518.28 |
| 124 | 28/06/2027 | 152,518.28 | 1,650.00 | 1,014.51 | 635.49 | 151,503.77 |
| 125 | 28/07/2027 | 151,503.77 | 1,650.00 | 1,018.73 | 631.27 | 150,485.04 |
| 126 | 28/08/2027 | 150,485.04 | 1,650.00 | 1,022.98 | 627.02 | 149,462.06 |
| 127 | 28/09/2027 | 149,462.06 | 1,650.00 | 1,027.24 | 622.76 | 148,434.82 |
| 128 | 28/10/2027 | 148,434.82 | 1,650.00 | 1,031.52 | 618.48 | 147,403.30 |
| 229 | 28/03/2036 | 19,230.75 | 1,650.00 | 1,569.87 | 80.13 | 17,660.88 |
| 230 | 28/04/2036 | 17,660.88 | 1,650.00 | 1,576.41 | 73.59 | 16,084.47 |
| 231 | 28/05/2036 | 16,084.47 | 1,650.00 | 1,582.98 | 67.02 | 14,501.49 |
| 232 | 28/06/2036 | 14,501.49 | 1,650.00 | 1,589.58 | 60.42 | 12,911.91 |
| 233 | 28/07/2036 | 12,911.91 | 1,650.00 | 1,596.20 | 53.80 | 11,315.71 |
| 234 | 28/08/2036 | 11,315.71 | 1,650.00 | 1,602.85 | 47.15 | 9,712.86 |
| 235 | 28/09/2036 | 9,712.86 | 1,650.00 | 1,609.53 | 40.47 | 8,103.33 |
| 236 | 28/10/2036 | 8,103.33 | 1,650.00 | 1,616.24 | 33.76 | 6,487.09 |
| 237 | 28/11/2036 | 6,487.09 | 1,650.00 | 1,622.97 | 27.03 | 4,864.12 |
| 238 | 28/12/2036 | 4,864.12 | 1,650.00 | 1,629.73 | 20.27 | 3,234.39 |
| 239 | 28/01/2037 | 3,234.39 | 1,650.00 | 1,636.52 | 13.48 | 1,597.87 |
So what does all of that have to do with reducing the interest cost to you? Well, if you look carefully at the table, you will notice that there is a beginning balance and an ending balance. Each interest payment is made to a corresponding beginning balance. Eg. In month 1, the interest due on the fully disbursed loan of $250,000 on March 28, 2017 is $1041.67 with $608.33 being applied to the principal resulting in an ending balance of $249,391.67 (also the beginning balance for the next month). The next month, April 28, 2017, the interest due on the balance from the end of March is $1,039.13, $610.87 to principal, leaving an ending balance of $248,780.80. On May 28, 2017, the interest due on the balance of $248,780.80 is $1,036.59 with the corresponding principal payment of $613.41; and on and on until the end. This therefore means that the ending balance determines the amount that would be due for interest payment. So if in month 2 you were able to pay your regular monthly payment of $1,650.00 plus the principal amount of $613.41 which would be due in month 3 you would not have to pay the $1036.59 due for that month since interest would generate on the smaller balance of $248,167.39, resulting in a saving of the said amount ($1,036.59).
At first glance it appears that the saving is only $2.56, but if you look carefully, you would see that you end up a month ahead in your payment schedule since you by-pass month 3 of the schedule and go to month 4. By doing this monthly (or as often as you can) you would save thousands of dollars in interest while also reducing your repayment period. Yes, I said it. Look at it a second time. Still not clear, look at it a third time. Call a friend to look at it with you, and give it another look by yourself! Do you see it now? Great!
Please note that the figures used were to point out the numbers in the schedule for ease of reference. If you were not able to pay the full month’s principal payment as an extra payment, but only $300.00 or even $200.00, it only means that the interest saving would be less, but there would be a saving none the less.
There’s so many more tips to give, but I will leave them for another time in order to give time to process the above information.
See you next week!
Have a great weekend, Gerlan.
