Home Loan Structure

Hi Folks ,

Why are home loans structured in a way that major part of 1st 15 years goes to Interest rather than Principal .EG ? Is there a way to structure a loan in a way that you can pay principal and interest equally ?

Also is there a way of ensuring that extra payments towards home loan reduces your principal instead of interest ?

Simple maths. The interest component at any time is calculated on the outstanding principal amount. Therefore at the beginning of the loan, the outstanding loan balance is high, so interest is high. As the principle is paid off, the interest component decreases so nearer the end of the loan the outstanding loan amount is small and likewise so is the interest component.

There are two ways to reduce your principal. First is extra payments towards your home loan above the standard repayments which directly reduces your principal (don't understand why you thought this would reduce your interest as well). Second is money in an offset account, so that the interest is charged on a lesser amount and more of your standard repayment goes towards the principal. Both have the same effect.

Cheers

Tom

Namz if you want to have a higher proportion of your payments as principal in the early years then you just have to make extra repayments. Making extra repayments is the #1 way to pay your loan off quickly.