Financial Dictionary - Constant payment
This is the most commonly used system for calculating loans and mortgages. As the name implies, the repayments are constant. This means that all of the repayments are the same throughout the life of the loan, unless the interest rate changes. This is also known as the French system.
In this case, the instalment payments have two parts: the interest for the period and a portion of the amortisation of the loan to be repaid. This means the debt is paid off little by little, without needing to make long-term provisions.
Most fixed and variable-rate mortgages are constant repayment. The difference between these is that the repayments are constant throughout the term of the loan for fixed-rate mortgages, but vary in response to changes in interest rates in variable-rate mortgages. This system is why most of the repayments correspond to payments of interest and very little to principal at the beginning of a mortgage, with this relationship reversing as time passes.
Financial institutions choose this system because it allows them to accurately project the monthly income they will receive from their mortgage customers. It is also beneficial for customers, as they have constant (or almost constant in the case of variable-rate mortgages) repayments. Repayments are recalculated and modified using this system when interest rates rise or fall.