How loan amortisation works and why extra repayments help
On a standard loan you pay the same amount every month, but the split between interest and principal keeps changing.
Amortisation means paying a loan off in regular instalments. Each month the lender charges interest on what you still owe, and the rest of your repayment reduces the balance. Because the balance is highest at the start, early repayments are mostly interest.
Worked example: $500,000 at 6.2% over 30 years
Item
Amount
Monthly repayment
$3,062.34
Interest in year 1
$30,834
Principal repaid in year 1
$5,914
Balance after year 1
$494,086
Total interest over 30 years
$602,444
💡 Pro Tip: In year 1 about 84 cents of every repayment dollar is interest. That share falls slowly, which is why a loan seems to barely move for the first few years.
What an extra $500 a month does
Adding $500 a month to the same loan finishes it in 20 years 11 months instead of 30 and saves about $209,582 in interest. Extra repayments work because every dollar goes straight to principal, so the next month's interest is lower too.
Things to check before paying extra
Some fixed-rate loans cap extra repayments, and some lenders charge fees to withdraw them again. An offset account can give a similar interest saving while keeping your money accessible. Check your loan contract, and speak to your lender or a licensed adviser.
✨ Key Takeaways
Early repayments are mostly interest.
Extra repayments go straight to principal and snowball.
