Whether you have taken out a mortgage or other loan, you will have come across the term principal. What do you mean by it? Loan repayment is the repayment of the principal of the debt, i.e. the part of the repayment by which the amount owed is reduced.
What is principal and interest
Each loan payment has two components, principal and interest, and may include some additional fees. Interest is the monetary reward for borrowing money, and principal is the periodic payment of a proportionate part of the principal amount by which the principal of the loan is reduced.
The mortgage principal
Like other loans, your mortgage payment consists of principal and interest, usually paid monthly.
V In the case of annuity repayment, the principal initially represents only a minimal part of the repayment (amounting to a few percent), but with each subsequent repayment the amount of the principal increases and the amount of the interest decreases. However, the amount of the instalment itself remains constant. In the case of an interest-free loan, the principal is equal to the amount of the instalment.
Did you know that mortgage loans are not redeemed when the mortgage loan is not fully drawn down or the client takes out a so-called pre-mortgage loan?
How is the principal counted?
If you repay the loan by annuity, which is the most common way, then as a borrower you pay the same amount to the lender each month, but over time the ratio between principal and interest changes. At the beginning, the interest is the highest and the principal is the lowest; at the end of the loan, it is the other way around. You can calculate the amount of the annuity payment using the following formula.
a = U p(1+)
a … amount of repayment
U … the amount of the loan
P … interest rates for the period
n … number of periods