Property Investment – What is Loan Amortization?

For those who are interested in going into property investment for the first time, please take time to understand how you are being charged for the loan by the bank.

What is Loan Amortization?

Wikipedia explains amortization as the process of decreasing or accounting for an amount over a period of time.

And if we are talking about real estate investment or property investment, amortization is a method for repaying a loan in equal instalments of which part will be interest due and the remainder will go to reduce the principal amount; the balance of the loan. As the loan amount is gradually reduced, a progressively larger amount will go towards reducing the principal.

For example, if you are taking a loan of $100,000 for 30 years at an rate of 6.75 (BLR (base lending rate of 5.75%) + 1%, the following is how your “Loan Summary” will look like. You will notice that you pay more interest than principal at the beginning of a loan period but at the end your payment goes more towards the principal. If you opt for 30 years to pay back your $100,000 loan, you only pay a monthly instalment amount of $648.60 but you ended up paying back $233,495.31 for a $100,000 loan of 30 years.

Loan Summary

Monthly Principal & Interest $648.60 Total of 360 Payments $233,495.31

Total Interest Paid $133,495.31 Pay-off Date Oct,2037

Lets take the same loan amount and calculate it on a 15-year period to see whether it is affordable and how much you can save. The “Loan Summary” below shows that you will have to pay a monthly loan repayment of $884.91, an additional of $236.31 but you ended saving a whopping amount of $72,211.61 on interest.

Loan Summary

Monthly Principal & Interest $884.91 Total of 360 Payments $159,283.70

Total Interest Paid $59,283.70 Pay-off Date Oct, 2022

Reducing the number of years you take to complete paying the loan amount will help you save a lot on interest.

Another way of saving is to increase the amount of your loan payment. For this example, if you increase your monthly payment to $902.62, (an additional amount of only $17.71) the period to complete your loan will be reduced to 14.5 years with a saving of $2,228.24.

As I have said over and over again, property investment is long term investment and has liquidity constraint. However, if it’s a good piece of property that will appreciate in value over time and is rentable, it is worth investing in.

If you were to put in your cash of $150,000 to purchase a property of $250,000; with a loan of $100,000, a $1,400 monthly rental income will cover your instalment payment as well as an assumed fixed interest rate of 4% on your $150,000 cash investment.

Keep your credit score clean, get a good interest rate from your bank, use the services of the bank to leverage on real estate investment. Property investment is a worthwhile investing avenue to look into.