In Brief (TL;DR)
Discover the technical workings of the French amortization plan and learn how to calculate the monthly payment by analyzing the impact of the principal and interest portions.
We analyze the technical repayment mechanism in detail to understand how the principal and interest portions determine your monthly payment.
Learn more about how the variation between the principal and interest portions affects the composition of the monthly payment and the repayment plan.
The devil is in the details. 👇 Keep reading to discover the critical steps and practical tips to avoid mistakes.
Buying a home is still one of the most significant milestones in the lives of many Italian families. It’s a moment that intertwines dreams, life plans, and, inevitably, complex financial matters. When you sit down at a bank desk to apply for a mortgage, you encounter technical terms that can seem daunting. Among these, the most common and yet least understood is the French amortization plan.
This repayment system is the de facto standard in the Italian and European credit market. Its popularity is no accident: it meets a psychological and practical need deeply rooted in our culture—stability. Knowing exactly how much you’ll have to pay each month allows you to plan your family budget with peace of mind, turning a decades-long debt into a manageable expense.
However, understanding the mathematical mechanism behind the payment is essential for making informed choices. It’s not just about paying a monthly sum, but about understanding how that sum is divided between repaying the actual debt and paying interest to the bank. This awareness is the only tool for evaluating the benefits of a potential early repayment or renegotiation.
The French amortization plan is a method that favors a constant payment, while hiding a constantly shifting internal dynamic between principal and interest.
What Is the French System?
The French amortization system is a loan repayment method that involves periodic payments, usually monthly, of a constant amount over time (assuming a fixed rate). The key feature of this plan is not the total payment amount, which remains unchanged, but its internal composition.
Each payment we make is composed of two distinct elements. The first is the principal portion, which is the part of the money that actually repays the borrowed sum. The second is the interest portion, which represents the bank’s earnings, calculated on the remaining principal to be repaid. In the French system, these two components follow opposite trajectories over the life of the mortgage.
At the beginning of the loan, the payment is predominantly composed of interest and a very small part of the principal. As payments proceed, this proportion reverses. Towards the end of the mortgage, the payment will consist almost entirely of the principal portion, while the interest will be minimal. To learn more about how these components interact, it’s helpful to consult a specific guide on mortgage payments, principal, and interest portions.
The Math Behind the Constant Payment
The mathematical logic governing this system is designed to keep the monthly outlay identical for the entire duration of the plan (at a constant interest rate). Since interest is always calculated on the outstanding debt, and the debt is highest at the beginning, the interest portion of the first payment will be the highest of all.
To keep the payment constant while the interest portion decreases, the principal portion must necessarily increase. This creates a “scissor” effect. In the early years, the borrower feels like they are never paying down the principal debt, as a large part of their payment only covers the accrued interest. It’s a mechanism that rewards the bank in the early years and protects the debtor by guaranteeing a sustainable payment.
Why Italian Banks Prefer It
In the Italian banking landscape, the French method is almost ubiquitous. The reasons are both commercial and technical. From the customer’s point of view, it offers the security of a fixed expense, a crucial element for fixed-income families who need to balance their books at the end of the month. This predictability fits perfectly with the Mediterranean culture of saving.
From the bank’s perspective, this system ensures a faster return on interest compared to other methods. Since interest is more heavily “front-loaded,” the financial institution reduces its risk. If the customer were to pay off the mortgage halfway through, the bank would have already collected a significant portion of the total expected interest.
Comparison with the Italian Method
There is a historical alternative, known as Italian amortization, which works differently. In this system, the principal portion is constant throughout the loan’s duration. Consequently, as the interest decreases while the debt goes down, the total payment is not fixed but declines over time.
With the Italian method, the initial payments are much higher than those of the French method, then become lighter towards the end. Although this results in overall interest savings (because the principal is paid down faster), the initial impact on the family budget is often unsustainable for many young couples. For those evaluating current options, it is essential to get informed about 2025 mortgages and rate trends to understand which strategy to adopt.
Calculating the Payment: A Practical Example
Let’s imagine taking out a €100,000 mortgage for 20 years at a fixed rate of 3%. With the French method, the bank calculates a payment that will zero out the debt at the exact maturity date. The financial formula is complex, but the result is clear: we would pay about €554 per month.
In the first payment, about €250 will be just interest (3% annually on €100,000, divided by 12 months), while the remaining €304 will go toward reducing the principal. By the 100th payment, the outstanding debt will have decreased, so the interest portion will be much lower, allowing a larger part of the €554 to reduce the principal. This dynamic balance is the heart of the system.
Advantages of the French Plan
The main advantage is undoubtedly financial sustainability. Knowing that the payment will not change (in fixed-rate mortgages) allows for long-term expense planning, such as children’s education or a supplementary pension. It also provides access to credit for those with initially lower incomes, as the starting payment is lower compared to the constant principal method.
Another benefit is the simplicity of automatic management. With direct debit from a bank account, the borrower doesn’t have to worry about monthly variations. It is the ideal solution for those who seek peace of mind above all else, delegating the mathematical complexity to the credit institution. For those who prefer to manage everything remotely, it’s useful to consult a guide on online vs. in-branch mortgages.
Disadvantages and Hidden Risks
The downside lies in the total cost of the loan. All other conditions being equal, with the French method, you pay more in total interest compared to the Italian method, precisely because the principal is repaid more slowly. The outstanding debt remains high for a longer time, generating more interest.
Furthermore, this system makes early repayment less advantageous in the later years of the mortgage. If you decide to pay off the mortgage after 15 out of 20 years, you will find that you have already paid almost all the interest due, while the remaining debt (the principal to be returned) is still surprisingly high. To understand how to navigate these situations, it is advisable to read the in-depth article on mortgage prepayment and bureaucracy.
Early repayment of a French-style mortgage is most financially efficient in the first half of the loan term, when the reduction in future interest is significant.
The Impact of Inflation on the Payment
An often-overlooked aspect is the relationship between a constant payment and inflation. In a healthy economy, the value of money tends to decrease over time, while salaries and the cost of living increase. A payment fixed today at €600 will have a significantly lower real “weight” on the family budget in twenty years.
By keeping the nominal payment fixed, the French amortization plan leverages this mechanism to the debtor’s advantage in the long run. What seems like a significant sacrifice today might represent a much smaller percentage of available monthly income in ten or fifteen years, making the mortgage progressively easier to bear.
Conclusions
The French amortization plan represents an ingenious compromise between the security needs of banks and the stability needs of families. Although it entails a slightly higher overall cost in terms of interest, its ability to make homeownership accessible and predictable makes it the primary tool in the Italian real estate market.
Understanding the distinction between the principal portion and the interest portion is not an academic exercise but a practical necessity for anyone with a mortgage. It allows you to clearly assess when it’s beneficial to refinance, renegotiate, or pay off the debt. In an increasingly complex financial world, knowledge is the only true savings tool at our disposal.
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