What is amortisation?
Amortisation is the gradual reduction of a loan balance through scheduled principal-and-interest repayments, where each period's payment covers the interest charge plus a slice of principal calculated to retire the loan over the term.
Amortisation is the process by which a loan retires through scheduled payments. The payment for each period is set by the amortisation formula: P × r × (1+r)ⁿ / ((1+r)ⁿ − 1), where P is the loan amount, r is the periodic interest rate (annual / 12 for monthly), and n is the total number of payments.
Early in the loan, most of each payment goes to interest because the balance is large; later, as the balance shrinks, the interest portion drops and the principal portion grows. This shape is why extra repayments in the first 5-10 years deliver much more interest saving than the same dollar applied in the final 5 years.
An interest-only loan is non-amortising during the IO period, the principal stays flat. After the IO term reverts to P&I, the remaining principal amortises over the shorter remaining term, which is why post-IO repayments often jump 30-40%.
Also called
loan amortisation · amortization schedule
Related
- Principal and interest (P&I): P&I repayments cover both the interest charged for the period AND a portion of the loan principal, so the loan balance r…
- Interest-only (IO): An interest-only loan asks you to pay only the interest charge each period, so the loan principal stays unchanged until …
General information only, not personal financial advice. Verified against https://ratesniffers.com.au/glossary on 2026-06-01.