Why does it feel like your loan balance isn’t going down? And all you’re paying is interest?
It’s the harsh reality of a mortgage (or any fixed term loan), you pay the interest first, before you start making meaningful headway on the actual loan itself.
If you’re on a 30-year mortgage, at current rates, it will be 10-15 years before that switches and you start eating away at the principal portion of your loan more so than interest.
Let’s explore why all the interest is front loaded.
The mortgage you’re re-paying is what’s known as a “Table Loan”. A Table loan is one in which the term and the repayments are fixed. It doesn’t mean that the interest rate is fixed, which we already know as you can structure your mortgage in a million different ways these days with all sorts of different interest rate terms.
So, the term and the repayments are fixed. This is because the bankers will ‘amortize’ the loan over the term, which will determine the repayments, and the proportion of interest and principal within each repayment.
Mortgage interest is front-loaded because it's an 'Amortized' loan and the interest is charged on the balance, which is highest at the start of the loan.
Now, that proportion is really what we’re interested in here. The proportion is determined by the loan balance. You’re starting to see where I’m heading now….
The interest is front loaded because the outstanding loan balance is the highest at the beginning of the loan period. As the outstanding balance slowly reduces, so increases the portion of the repayment that is principal and so decreases the portion that is interest, until ultimately you reach the tipping point where the proportion of principal you are paying down is higher than the interest you are paying.
Keep in mind that at current rates, the amount of interest you are paying over your 30-year term roughly equivalent to the amount you are borrowing. A sobering thought.
There are a few amortization calculators out there that show you your loan schedule and break down each payment. I like this one https://www.moneyhub.co.nz/amortisation-calculator.html (not affiliated).