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
| Year | Interest | Principal | Balance |
| 2007 | $1,124.52 | $172.68 | $99,827.32 |
| 2008 | $6,705.41 | $1,077.77 | $98,749.55 |
| 2009 | $6,630.36 | $1,152.81 | $97,596.73 |
| 2010 | $6,550.09 | $1,233.08 | $96,363.65 |
| 2011 | $6,464.24 | $1,318.94 | $95,044.71 |
| 2012 | $6,372.40 | $1,410.77 | $93,633.94 |
| 2013 | $6,274.17 | $1,509.00 | $92,124.93 |
| 2014 | $6,169.10 | $1,614.07 | $90,510.86 |
| 2015 | $6,056.72 | $1,726.46 | $88,784.40 |
| 2016 | $5,936.51 | $1,846.67 | $86,937.74 |
| 2017 | $5,807.93 | $1,975.25 | $84,962.49 |
| 2018 | $5,670.40 | $2,112.78 | $82,849.71 |
| 2019 | $5,523.29 | $2,259.89 | $80,589.82 |
| 2020 | $5,365.94 | $2,417.24 | $78,172.58 |
| 2021 | $5,197.63 | $2,585.55 | $75,587.04 |
| 2022 | $5,017.61 | $2,765.57 | $72,821.47 |
| 2023 | $4,825.04 | $2,958.13 | $69,863.33 |
| 2024 | $4,619.08 | $3,164.10 | $66,699.23 |
| 2025 | $4,398.77 | $3,384.41 | $63,314.82 |
| 2026 | $4,163.12 | $3,620.06 | $59,694.76 |
| 2027 | $3,911.06 | $3,872.12 | $55,822.64 |
| 2028 | $3,641.45 | $4,141.73 | $51,680.91 |
| 2029 | $3,353.07 | $4,430.11 | $47,250.81 |
| 2030 | $3,044.61 | $4,738.57 | $42,512.24 |
| 2031 | $2,714.68 | $5,068.50 | $37,443.74 |
| 2032 | $2,361.77 | $5,421.41 | $32,022.33 |
| 2033 | $1,984.28 | $5,798.89 | $26,223.43 |
| 2034 | $1,580.52 | $6,202.66 | $20,020.78 |
| 2035 | $1,148.64 | $6,634.54 | $13,386.24 |
| 2036 | $686.69 | $7,096.49 | $6,289.75 |
| 2037 | $196.23 | $6,289.75 | $0.00 |
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
| | Interest | Principal | Balance |
| 2007 | $1,123.19 | $646.63 | $99,353.37 |
| 2008 | $6,583.01 | $4,035.90 | $95,317.46 |
| 2009 | $6,302.00 | $4,316.92 | $91,000.55 |
| 2010 | $6,001.42 | $4,617.49 | $86,383.05 |
| 2011 | $5,679.91 | $4,939.00 | $81,444.05 |
| 2012 | $5,336.02 | $5,282.89 | $76,161.16 |
| 2013 | $4,968.18 | $5,650.73 | $70,510.43 |
| 2014 | $4,574.73 | $6,044.18 | $64,466.25 |
| 2015 | $4,153.89 | $6,465.02 | $58,001.23 |
| 2016 | $3,703.74 | $6,915.17 | $51,086.06 |
| 2017 | $3,222.26 | $7,396.66 | $43,689.40 |
| 2018 | $2,707.24 | $7,911.67 | $35,777.73 |
| 2019 | $2,156.37 | $8,462.55 | $27,315.18 |
| 2020 | $1,567.14 | $9,051.77 | $18,263.41 |
| 2021 | $936.88 | $9,682.03 | $8,581.37 |
| 2022 | $267.72 | $8,581.37 | $0.00 |
2 comments:
Nice post dear, most of the property investors make $5,000 to $10,000 or more by flipping houses. These investors buy a home from a distressed seller and resell it quickly for a profit. Many distressed sellers offer excellent houses in perfect condition, they offer you this discount property for a quick sale. They do so because they are in need of money. Any you can take advantage of this situation to make quick cash.
Hi Rajesh
Thank you for your comment. Do you have any property investing experience to share? My only experience is to buy and leave it to appreciate while servicing the loan but have not done a quick turnover yet. I find it a bit of a hassle. I suppose one has just got to start doing before it becomes easier.
Maybe anyone who has experience can share with us.
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