Amortisation schedule

The month-by-month split of a loan payment between interest, which is a cost, and principal repayment, which reduces the balance.

Example

A 225,000 loan at 6.00% over 25 years costs 1,449.68 a month; in the first year 13,391.05 is interest and 4,005.09 repays principal.

Important

Only the interest is an expense - the principal portion converts cash into equity. Treating the whole payment as a cost makes a property look like it is losing money when it is building ownership, and the reverse error is just as common.

Related terms

• Leverage — Investing with borrowed money so that you control more of an asset than your own capital would buy. Gains and losses are both multiplied by the same factor.
• Debt service coverage ratio — Net operating income divided by the annual mortgage payments. Below 1.00 the asset does not pay for its own borrowing.
• Cash-on-cash return — A year of cash flow after financing, divided by the cash actually invested - deposit plus purchase costs - rather than by the price of the asset.

Lessons that explain it

• Leverage runs both ways, the round trip costs six per cent, and selling takes months — A mortgage multiplies the price move by four in either direction. The transaction costs are fifty times a broad fund's. And the exit is measured in months, at a price you negotiate rather than accept. (13 min)

All 578 terms in the Investing glossary