Introducing the concept of French amortization in the context of mortgages might seem complex, but it’s actually simpler than you think. If you’re considering taking out a mortgage to buy your home, or simply want to better understand how your current loan works, understanding French amortization is essential. This system, the most widespread in Italy and many other countries, determines how you will repay the principal to the bank over the years, directly influencing the amount of your monthly payments and the total interest you will pay.

In this complete and definitive guide, I will walk you through French amortization in a clear, simple, and practical way. We will start with the basic definition, analyze how the payment is calculated, explore the pros and cons of this method compared to other alternatives, and provide you with all the tools to understand if it’s the right choice for you. Whether you are a finance expert or a novice navigating the world of mortgages, you will find all the answers you’re looking for in this article, explained in an accessible way and without unnecessary jargon. Get ready to become a true expert on French amortization and make informed decisions for your financial future.

What Is French Amortization and How Does It Work

French amortization is a mortgage repayment system where the payments the borrower makes to the bank are constant for the entire duration of the loan. This consistency of the payment is the main and most appreciated feature of this method, as it allows the person taking out the mortgage to have predictability of expenses over time and to plan their family budget with greater peace of mind. However, it is important to note that although the payment amount remains unchanged, the internal composition of each payment varies over time.

Definition and Fundamental Principles

The fundamental principle of French amortization is that each payment is composed of two parts: an interest portion and a principal portion. At the beginning of the amortization schedule, the interest portion is predominant, while the principal portion is smaller. This is because interest is calculated on the remaining principal, which is the part of the mortgage that has yet to be repaid to the bank. As you proceed with the payments, the remaining principal decreases, and consequently, the interest portion within the payment also decreases. Simultaneously, the principal portion progressively increases, eventually becoming predominant in the final payments of the amortization schedule.

In summary, with French amortization, in the early years of the mortgage, you primarily pay interest, while the repayment of the principal occurs to a greater extent in the second half of the amortization schedule. This mechanism has important implications that we will discuss in detail in the following paragraphs, especially in terms of the total cost of the mortgage and flexibility in the case of early repayment.

Calculating the Payment: Formula and Components

The calculation of the payment in French amortization is based on a complex financial formula, but the basic concept is relatively simple. The constant payment is calculated in such a way as to guarantee the bank the repayment of the loaned principal and the payment of the agreed-upon interest, distributed over the entire term of the mortgage. To calculate the exact payment amount, several factors are taken into consideration:

• Loan amount (principal): The sum of money the bank lends to the borrower.
• Interest rate: The annual percentage of interest applied to the mortgage, which can be fixed or variable.
• Loan term: The period of time in years (or months) within which the borrower agrees to repay the mortgage.
• Payment frequency: Usually monthly, but can also be quarterly, semi-annually, or annually.

The mathematical formula for calculating the payment is as follows:

Payment = C * [i(1+i)^n] / [(1+i)^n - 1]

Where:

• Payment = The constant payment amount
• C = Initial loan principal
• i = Periodic interest rate (annual rate / payment frequency)
• n = Total number of payments (loan term in years * payment frequency)

Don’t be intimidated by this formula! Fortunately, you don’t need to manually calculate your mortgage payment. All banks and credit institutions provide online calculators that allow you to estimate the payment amount quickly and easily by simply entering the mortgage details (amount, rate, term). These calculators use the French amortization formula and provide a detailed amortization schedule, showing the composition of each payment (interest portion and principal portion) and the remaining debt over time.

French Amortization vs. Italian Amortization: Key Differences

Besides French amortization, there is another amortization method commonly used for mortgages: Italian amortization. Although both systems aim to repay the principal and interest to the bank, they have substantial differences that are important to know in order to choose the amortization plan that best suits your needs.

The main difference between the two methods concerns the payment structure. As we have seen, in French amortization, the payment is constant throughout the loan term. In Italian amortization, however, the payment is not constant but decreases over time. This is because in Italian amortization, the principal portion is constant throughout the loan term, while the interest portion decreases progressively, as it is calculated on the remaining principal, which is constantly being reduced.

Comparison Table: French Amortization vs. Italian Amortization

As the table shows, French and Italian amortization have different pros and cons. The choice between the two methods depends on the borrower’s priorities and financial situation. If the predictability of monthly payments is a priority, French amortization is the most suitable choice. If, on the other hand, you prefer to minimize the total cost of the mortgage and are able to handle higher initial payments, Italian amortization could be a more advantageous solution, although it is less common in banking practice.

Pros and Cons of French Amortization

French amortization, despite being the most widespread and appreciated method, has both pros and cons that are important to evaluate carefully before choosing the amortization plan for your mortgage. Knowing the pros and cons of this system allows you to make an informed decision and understand if it is the most suitable solution for your financial needs.

Pros for the Borrower

The main advantage of French amortization, as we have already pointed out, is the constant payment. This aspect offers a series of benefits for the borrower:

• Predictability of expenses: Knowing the exact amount of each monthly payment in advance for the entire mortgage term allows you to plan your family budget with greater precision and security. There are no surprises or unexpected variations in the amount to be paid each month, which facilitates personal finance management.
• Ease of budgeting: The constant payment simplifies family budget management, as it allows you to allocate a fixed portion of your monthly income to the mortgage payment, without having to anticipate changes over time. This is particularly useful for those with a stable income who prefer to have certainty about future expenses.
• Lower initial payments compared to Italian amortization: Generally, the initial payment of a French amortization loan is lower than the initial payment of an Italian amortization loan for the same mortgage amount, interest rate, and term. This can make French amortization more accessible for those with a limited initial repayment capacity or who prefer a smaller impact on their family budget in the early years of the mortgage.

In summary, the advantages of French amortization are mainly focused on the simplicity, predictability, and manageability of the monthly payments, aspects that are particularly appreciated by many borrowers.

Cons and Aspects to Consider

Despite its many advantages, French amortization also has some disadvantages and aspects to consider carefully:

• Higher total interest compared to Italian amortization: For the same amount, interest rate, and loan term, French amortization involves paying slightly higher total interest compared to Italian amortization. This is due to the payment composition mechanism, which features a predominant interest portion in the initial payments. Although the difference in total interest may not be enormous in absolute terms, it is still an aspect to keep in mind, especially for large, long-term mortgages.
• Slower principal repayment in the initial phase: As we have seen, in French amortization, the principal portion within the initial payments is smaller than the interest portion. This means that in the early years of the mortgage, you primarily repay the interest portion and only a small part of the loaned principal. The principal repayment becomes faster only in the second half of the amortization schedule. This aspect can be relevant in case of early repayment of the mortgage, especially in the first few years, as the remaining debt could still be substantial.
• Less flexibility in case of early repayment: Due to the slower principal repayment in the initial phase, French amortization can be less flexible if you want to repay the mortgage early, especially in the first few years. In these cases, the remaining principal to be repaid could be high, and consequently, so could the penalty for early repayment (if stipulated in the contract). However, it is important to note that current regulations have limited early repayment penalties, making this aspect less critical than in the past.

In summary, the disadvantages of French amortization are mainly related to the slightly higher total cost of the mortgage and the reduced flexibility in case of early repayment, especially in the early years. However, for many borrowers, the advantages in terms of predictability and simplicity of payments outweigh these disadvantages.

French Amortization and Mortgages: Practical Implications

After analyzing in detail the operation, pros, and cons of French amortization, it is important to understand how this system translates into practical implications for those taking out a mortgage. Choosing an amortization plan is an important decision that must be made with awareness, carefully evaluating your own needs and priorities.

Choosing an Amortization Plan: Determining Factors

The choice between French amortization and, possibly, other types of amortization (such as the less common Italian amortization) depends on a series of determining factors related to the borrower’s financial situation, their preferences, and their future expectations. Among the main factors to consider are:

• Risk tolerance: Those who prefer the certainty and predictability of monthly payments, even at the cost of paying slightly more in total interest, will find French amortization to be the ideal solution. Those who are more risk-tolerant and prefer to minimize the total cost of the mortgage, while accepting higher initial payments that decrease over time, might consider alternatives like Italian amortization (if available).
• Current and future financial situation: Those with a stable and predictable income over time might prefer the constant payment of French amortization, which facilitates family budget planning. Those who expect their income to grow over time might be more willing to handle the higher initial and decreasing payments of Italian amortization, benefiting from savings on total interest.
• Loan term: For long-term mortgages, the difference in total interest between French and Italian amortization could be more significant. In these cases, those aiming for savings might more carefully consider Italian amortization, if available. For short-term mortgages, the difference in total interest is reduced, and the convenience of the constant payment of French amortization could become the predominant factor.
• Expectations on interest rate trends: In a context of low and stable interest rates, the choice of amortization plan might be less influenced by expectations about rate trends. In a context of rising interest rates, those who have chosen a variable-rate mortgage with French amortization might benefit from the consistency of the payment, which cushions the impact of rate increases on monthly payments (although total interest will still increase).

Ultimately, there is no single best amortization plan. The choice depends on the specific needs of each borrower and a careful evaluation of the pros and cons of each system.

Practical Example of a French Amortization Schedule

To make the workings of French amortization more concrete, let’s look at a practical example of an amortization schedule for a €150,000 mortgage with a term of 20 years (240 monthly payments) and a fixed annual interest rate of 2.5%.

Using an online calculator for French amortization, we get the following information:

• Constant monthly payment: approximately €794
• Total interest: approximately €40,560
• Total amount to be repaid: approximately €190,560

The detailed amortization schedule would show for each monthly payment:

• Payment number: from 1 to 240
• Principal portion: Increasing over time, from a low initial value to a higher final value.
• Interest portion: Decreasing over time, from a high initial value to a very low final value.
• Remaining debt: Decreasing over time, starting from €150,000 down to zero at payment number 240.

For example, the first few payments of the amortization schedule might have this indicative composition:

• Payment 1: Principal portion: approx. €280, Interest portion: approx. €514
• Payment 12: Principal portion: approx. €287, Interest portion: approx. €507
• Payment 24: Principal portion: approx. €294, Interest portion: approx. €500

As you can see, the principal portion gradually increases, while the interest portion decreases accordingly, keeping the constant monthly payment at around €794. In the final payments of the amortization schedule, the principal portion will be predominant, while the interest portion will be minimal.

This practical example helps to visualize concretely how French amortization works and how the principal and interest portions are distributed over time.

Optimizing a Mortgage with French Amortization

Although French amortization is a standardized system, there are some strategies to optimize your mortgage and reduce the total cost of interest, even with this amortization plan. Among the main strategies, we find:

• Principal prepayments: Making additional principal payments beyond the scheduled monthly payments allows you to reduce the remaining principal on which interest is calculated more quickly. Even small prepayments, if made consistently, can lead to significant savings on total interest in the long run and a reduction in the overall mortgage term. It is important to check with the bank if there are any penalties for principal prepayments and to assess whether the benefit in terms of interest savings outweighs the potential cost of the penalty. However, as already mentioned, early repayment penalties have been limited by current regulations.
• Mortgage renegotiation: If market conditions change and interest rates fall, you can consider renegotiating the mortgage with your own bank or another credit institution. Renegotiation allows you to lower the interest rate applied to the mortgage, resulting in a reduction in the amount of monthly payments and total interest. Renegotiation can be particularly advantageous if the mortgage was taken out during a period of high interest rates and is still in its initial phase, when the interest portion of the payments is predominant.
• Mortgage refinancing (portability): Refinancing the mortgage, also known as portability, allows you to transfer your mortgage from one bank to another, maintaining the same contractual conditions (remaining amount, remaining term, rate type) but benefiting from a more favorable interest rate offered by the new bank. Refinancing is a free operation for the borrower and can be an excellent opportunity to reduce the cost of your mortgage and save on total interest, without having to change the structure of the amortization plan.

These strategies, if evaluated and implemented correctly, can help optimize your mortgage with French amortization and reduce the impact of interest on the total cost of buying a home.

Comparison Table: French Amortization at a Glance

Conclusions

French amortization stands as the benchmark amortization system for most mortgages in Italy and many other countries. Its simplicity, the predictability of monthly payments, and its ease of management make it particularly appreciated by borrowers, who can count on a fixed and constant expense over time, simplifying family financial planning. However, it is crucial to be aware of the limitations of this system, particularly the slightly higher total cost of the mortgage compared to alternatives like Italian amortization and the reduced flexibility in case of early repayment, especially in the early years of the loan.

The choice of the most suitable amortization plan for one’s needs is a personal decision that must be made with care and information. There is no one-size-fits-all solution, but it is important to carefully evaluate the pros and cons of each system, taking into account one’s risk tolerance, current and future financial situation, the loan term, and expectations about interest rate trends. French amortization represents a balanced and reliable solution for most borrowers, offering a good compromise between cost, predictability, and simplicity.

For those seeking maximum predictability and ease of management, without giving up a widely tested and widespread solution, French amortization proves to be the most suitable and reassuring choice. In any case, it is always advisable to compare offers from different banks and request a detailed amortization schedule to concretely assess the impact of French amortization on the total cost of your mortgage and make an informed and conscious decision.

Frequently Asked Questions