Back 2 Basic: Mortgage

Mortgage loan or home loan is the money which you borrow from bank to buy your house. It is the process transfer of interest in a property as a security to the lender. The word mortgage came from Old French word, which means death pledge. The death is actually referring to the end of pledge when the property obligation is fulfilled or is taken away for foreclosure.

Compared to ‘Hire Purchase’ loan, mortgage or housing loan is easier to understand. But to calculate the monthly payment, it would require a complicated formula. Don’t worry I won’t be touching all lot on it. I’ll teach you on how mortgage works and some simple calculations. Let’s start with an example.

Miss Florina bought a house for $125,000. She paid 10% down payment and took mortgage from bank for the balance, $112,500. The bank charges a fixed interest of 7% per annum calculated on monthly basis. Her tenure is for 30 years.

(Monthly basis is also known as monthly rest)

How to calculate the monthly installment? To calculate the monthly installment we have to use the following formula.


Yup, I know the formula look complicated. Even I didn’t use this formula to calculate. Instead I just used a financial calculator.

By using my financial calculator, the monthly installment computed is $744.13.

Now it’s time to look at how the interest is calculated. Instead of using any complicated mathematical formula, I’ll just show you through simple calculation.


Why we divide by 12? This is because the interest is calculated on monthly basis. A year has 12 months. In reality, majority of the banks’ interest is calculated on daily basis.


As you can see, the interest is calculated based on your balance at the end of 1st month. It’s not fixed interest like hire purchase loan. If you make additional payment, your interest will be calculated based on your mortgage balance. Let’s look at the table below for first 6 month of calculation.


Now let say Miss Florina got 2 months bonus from her company. She decided to pay 6 month installment one shot on the first month it self. Let see what has changed.


The first thing you might have noticed is the balance at the end of 6th month is lower by $66.14.

Let’s have a look, if the interest is calculated yearly basis and she paid 6 month installment one shot.


What did you notice? The first difference is the interest is calculated for the entire year at the beginning, unlike monthly basis where you calculate the interest every month.

Some of you might be wondering on how to calculate the total interest for any year without calculating month by month or day by day for daily basis. There are formulas to calculate them, but unfortunately I don’t have them and it is rather complicated. The easiest way is by using a financial calculator.

That’s all for our 2nd back to basic. Hope all of you learn something from it. Get ready to maximize your mortgage in near future. You will learn how to use your mortgage efficiently and maximize your money management. Coming soon…

Happy Learning. ;)