Mortgage pre-amortization: what is it? Interest calculation
A pre-amortization on a mortgage means a period of time in which the borrower undertakes to pay only the interest on the loaned capital . Typically, a loan, like almost all loans, provides for the loan of a capital to those who request it in exchange for the return of a larger amount to the bank: this increase corresponds to the interest to be paid on the capital, expressed by a percentage of the total amount. The methods of calculating the interest on the pre-amortization and the characteristics of their payment have a significant impact on the progress of a loan.
The expiration dates of the installments and the methods
Their repayment are summarized in the amortization plan, which is proposed by the bank when the loan is disbursed. The pre-amortization is a limited period of time within which the borrower is required to repay only the interest and not the loaned capital. In particular, there is talk of financial pre – amortization when a period is granted to the customer, which can also be up to 5 years under certain conditions, in which he will pay only the pre-amortization interest.
But we must pay attention and not confuse this advantage with a calculation technique of the amortization plan that concentrates the payment of interest in the first installments of the loan: the depreciation in French, this is the name of the technique in question, however, provides that in the first installments there is a share of capital. On the contrary, obtaining a pre-amortization, the share of capital will be repaid only starting from the end of this initial period.
The most typical case of pre-amortization of a real estate loan concerns mortgages due to construction or work progress
These are loans usually granted to construction companies engaged in the construction of a new building or in major renovation works. The particularity of this mortgage is that the capital is not lent in a single solution, but in several tranches, after specific appraisals have certified a correct progress of the work . Precisely in construction loans, banks often recognize a loan pre-amortization period, so as not to excessively burden the first phase of the company’s work.