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Financial Dictionary - Decreasing repayments
Decreasing repayments
In the decreasing repayment system, the principal amortised is always the same. This means that the interest to be paid reduces over time, as do the repayment instalments as a result. While the constant amortisation system is known as the French system, the decreasing amortisation system is known as the German system.
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This is a model where most of the interest is paid in the initial years of the loan. The interest is calculated based on the principal still to be amortised. Therefore, the lower the principal, the less interest is payable. The main drawback with this system is you pay more at the beginning. This means this amortisation model is not suitable for everyone.