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What is an annuity payment?

4.8.2021

Everyone who has a mortgage knows that during a set period of time, a fixed amount must be paid to the bank each month on a regular basis. But not everyone knows what this fixed amount consists of, it is called an annuity.

     The annuity includes two parts: interest, which is the interest we pay to the bank for using the money, and instalment, which is the repayment of the principal. The ratio of these two parts changes during the process of repaying the loan. Initially, the largest part is the interest on the debt itself and the remaining part is used to reduce the amount of the total liability. Over time, the debt decreases, but the monthly payment does not change. This is linked to the fact that the interest we pay is charged on the balance of the liability, which means that with each payment the total debt will be reduced by a larger amount and the overall mortgage loan will be repaid faster.

     The annuity is affected by the amount of the loan, the amount of interest and the term of the loan. The higher the loan amount, the higher the monthly payment will be and vice versa. The same rule works for interest. The longer the loan term, the lower the monthly payment.

     However, the annuity or monthly mortgage payment can be changed. This happens by agreement with the bank or in the case of refinancing, changing the term of the loan, repaying part of the debt before the scheduled date or in the event of a change in interest rates when the loan is re-fixed. For example, you started earning more and it was more convenient for you to pay more per month so you could pay it off sooner. It's also important to remember that you can get a tax deduction each year for the portion of the annuity in which you pay interest on the loan.

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