Question

1. If a loan has a 10-year amortization period with a fixed interest rate, will the interest paid in the eighth year be equal to the interest paid in the fifth year?  
2. With respect to when the balance will be paid off, does it matter when, in the term, a lump sum payment is made on the principal of a mortgage?
3. Does skipping the 10th mortgage payment have the same consequence to lengthening the amortization period as skipping the 35th payment?  

Answer 1

a). Loan amortization with a fixed interest rate refers to equated monthly installment (EMI) payments whereby borrower is required to pay periodic EMI to pay the interest and also contribute to the principal loan balance. Thereby EMI contains two parts - Interest component and principal loan repayment.

Interest component would be computed on the closing balance of outstanding principal. Hence as time progresses and EMI are paid, outstanding loan balance would reduce leading to reduction in interest component forming part of the periodic EMI.

Hence interest paid in eighth year would be less than interest paid in 5th year owing to repayment of principal loan amount from 5th year to 8th year.

b). Yes, it matters as to when the lump sum principal repayment is made. Early lump sum payment would reduce the outstanding principal amount leading to reduction to interest liability. Hence loan can restructured in two ways in this scenario (lump sum repayment) - reduction in EMI tenure or reduction in period EMI amount.

c). Impact on account of skipping the 10th mortgage payment and skipping 35th mortgage payment are not the same as 10th mortgage payment would carry a lower value of principal loan repayment and higher contribution towards interest payment. On contrary, 35th payment would carry higher value towards principal loan repayment and lower contribution towards interest payment.