In-depth
How the Amortization Schedule Calculation Works
The amortization schedule is the table that shows, payment by payment, how a mortgage or loan is repaid. For each payment, it indicates the principal portion, the interest portion, the total payment, and the remaining balance.
French Amortization Method
The most common method in Italy is French amortization (fixed payments):
- The payment is constant throughout the entire loan term
- The interest portion decreases over time (calculated on the remaining balance)
- The principal portion increases over time
- At the beginning you mostly pay interest, towards the end mostly principal
The Payment Formula
The monthly payment is calculated with this formula:
Payment = C × r / [1 - (1 + r)-n]
Where:
- C = financed amount
- r = monthly interest rate (annual rate / 12)
- n = total number of payments
Practical Example
Mortgage of €150,000 at 3% annually for 25 years (300 payments):
- Monthly payment: €711.32
- Total interest: €63,396
- Total repaid: €213,396
In the first payment: €336.32 goes toward principal and €375.00 toward interest. In the last payment: €709.55 toward principal and only €1.77 toward interest.
French vs Italian Amortization
| Feature | French | Italian |
|---|---|---|
| Payment | Constant | Decreasing |
| Principal portion | Increasing | Constant |
| Interest portion | Decreasing | Decreasing |
| Total interest | Higher | Lower |
| Prevalence | More common | Less common |
How to Read the Amortization Schedule
Each row in the schedule represents a payment and contains:
- Payment number and due date
- Principal portion: the part that reduces the debt
- Interest portion: the cost of financing
- Total payment: principal portion + interest portion
- Remaining balance: how much is left to repay
Practical Tips
- Compare different term and rate scenarios before choosing a mortgage
- With longer terms the payment is lower but you pay much more in interest
- Early repayment is especially beneficial in the first years of the mortgage
- The APR (not just the nominal rate) includes all actual financing costs
