This is how the mortgage amortization works
If a mortgage is taken out, it must be repaid to the bank at a specified time. Paying off a mortgage is known as amortization or simply as repayment. A distinction must be made between two forms of repayment: indirect and the direct. When calculating amortization for real estate, the duration must also be considered. Among other things, it plays a role if a property is purchased as an investment and then rented out, because here it is possible to calculate when the purchase costs can be covered by the rental income. As a rule, as the amortization amount increases, the quicker the property is paid off.
Amortization and its significance
The question "what does amortization mean" needs to be answered somewhat differently in relation to real estate than in other cases. Normally, in the economic context, the term indicates to the profitability of an investment. This refers to the coverage of an investment by all related income. The definition of amortization time describes the period of time required for an investment to be fully recovered. In the case of real estate purchases, however, the amortization of a condominium, land or house is the regular repayment of the real estate loan. Therefore, the focus is less on the return, since such a return does not arise in the case of private use of a house, property or apartment.
How can I pay off a mortgage?
When buying a property, there is direct or indirect repayment of a mortgage, which can be used to repay the loan to the bank or credit institution. In the direct variant, the buyer repays a portion of the loan at regular intervals. Each payment reduces the total amount of the mortgage, which also has a mitigating effect on the cost of interest. Thus, after each repayment, a smaller debt interest deduction will be claimed on the tax return. With indirect repayment, the amount of the instalment remains the same. The bank requires repayment, but instead you, as the real estate buyer, pay into a retirement savings or deposit account. The capital that accumulates there serves as collateral for the bank and is pledged in its favour. It is then used to repay the mortgage.
Overview of advantages and disadvantages
Direct amortization has the advantage of decreasing mortgage debt, which means that the borrower's interest burden decreases steadily over the amortization period. However, the debt interest that can be claimed on the tax return also decreases, so that the tax burden again increases over time. The indirect option, on the other hand, allows mortgage interest to be deducted in full from taxable income. This form of repayment offers good conditions for interest charges due to the additional security of the accumulated capital. However, the mortgage debt and interest burden remain the same, and price fluctuations can also occur.
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