Amortisation Profiles
The period for which a loan is treated as running for the purposes of calculating fixed monthly payments.
Amortisation is the process by which debt is paid off with a fixed repayment schedule in regular instalments over a certain time period. However, for especially large loans, the monthly repayments may be too high to be manageable for the borrower. This may lead to the loan repayments being recalculated on a longer amortisation profile, so that the loan has the same monthly repayments as a longer loan.
What are the consequences of amortisation?
Recalculating a loan on a longer amortisation profile means at end of the shorter term, there is still a difference that the borrower must pay back - which, in the case of a mortgage, they may do by refinancing or selling the property.Practical Application Example
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If loan repayments are calculated on a 20-year amortisation profile, the repayments will be the same as those for a standard 20-year loan, despite the loan actually running for what may be a much shorter period. So if £20,000 is paid in instalments over the lifetime of a £50,000 loan term, the remaining £30,000 must be repaid at the end of the loan term. ”
