Glossary
Amortisation
Paying a loan down to zero over its term, a bit of principal at a time, rather than paying interest and leaving the debt where it started.
In plain English
An amortising facility repays principal alongside interest, so the balance falls every month and reaches zero at the end of the term. Early payments are mostly interest, because interest is charged on a larger balance; later payments are mostly principal. The instalment does not change, but what it is doing changes completely.
The amortisation period is not always the same as the loan term. A facility can be written over five years but amortised as though it ran for fifteen, which lowers the repayment and leaves a balance owing at the end. That balance has to be repaid, refinanced or rolled, and the difference between the two numbers is where a lot of unpleasant surprises live.
Why a lender cares
The amortisation period drives the repayment, and the repayment drives serviceability. Stretching amortisation is the most common way a marginal deal is made to service, which is exactly why a credit team looks at whether the term matches the life of the thing being funded. Twenty-year amortisation on an asset with a seven-year working life is a problem being deferred rather than solved.
Worked example
A $500,000 facility at 8% over ten years costs about $6,066 a month and clears. The same facility amortised over twenty years costs about $4,182, which services far more easily, and still owes roughly $345,000 at the ten-year mark.
Reading up because a deal or a facility is on the table? One call with Nick gets you a straight read on your numbers, free.
Book a call