Repayment plan – Installment of mortgage
The calculation of the “French-style” repayment plan is a method for outlining the amount of the repayment installments of a mortgage or any financing. The various types of loans can be distinguished from various elements: from their duration to the type of interest rate applied (fixed or variable) up to the aims it pursues: the purchase or restructuring of a property (the mortgage), the support to young couples, the granting of facilities for accessing credit and so on. Another element that distinguishes each loan is the progress of the installments and their composition.
The installments are the periodic payments to be paid to the bank for the repayment of the loaned capital. Their frequency is established at the time of signing the contract: they are usually monthly, but mortgages or loans from two-monthly, quarterly or even longer periods may occur. The detailed repayment schedule of the installments constitutes the repayment plan of the loan , which precisely defines deadlines and amounts. Regardless of the type of plan chosen, each installment will in any case consist of a share of capital, which counts the portion of the amount received on loan that is returned with that single payment, and the interest portion, which instead defines how much interest is paid that time.
The relationship between these two quotas can however change over time: this is precisely the functioning of depreciation using the French method or, as would be better defined, depreciation in constant installments . The main feature of this calculation system is to keep the amount of the installments always the same for the entire duration of the repayment, thus ensuring a certain stability to the borrower, who knows precisely the value of the installment to be paid. This result is achieved by calculating a relationship between interest and principal amount that varies over time.
Initially, in the single installment the share of interest will prevail, given that these are calculated on a very large slice of capital, which tends to decrease, however, with each payment. The more installments you repay, the more capital decreases, even if at the beginning of a little each time, the value of interest is reduced. As these decrease, the amount of capital that is repaid with each installment rises and this dynamic ensures that the value of the installment is always the same.
Don’t worry anyway: you can comfortably perform this complicated calculation of French depreciation using an online calculator.