Equal amortization vs. equal principal repayments

It’s not surprising that people have a hard time understanding the difference between these two terms used for monthly repayments of a mortgage, equal amortization (jafnar greiðslur in Icelandic) and equal principal repayments (jafnar afborganir). The two methods are different and the debt service, i.e. how much you need to repay, can vary greatly.

Equal amortization

Equal amortization is when you take out a loan and the amount repaid on the loan is the same every month. The amount does not change unless the interest rate changes or the consumer price index changes if the loan is inflation-linked. In order to equalize the payments, the proportion of interest paid is much higher in payments made during the first part of the loan period, while payments of the loan principal are lower. As the loan period progresses, the proportion of the loan principal being paid increases, but the amount paid remains the same. In this case, you build equity more slowly in the first part of the loan period.

Equal principal payments

It’s less common for people to choose equal principal payments, but many people still pay off their mortgages like this. When you choose equal principal payments, the same amount of the loan principal is paid every month and interest is added to this amount. As a result, the repayments are high at the beginning of the loan period but decrease through the loan period.