Outstanding equity is one of the most important concepts in mortgages, but many people overlook it when planning their finances. Understanding what it is and how to manage it will help you reduce debt faster and save money in the long run.
What is outstanding capital?
The outstanding principal on a mortgage is the amount of money you still owe the bank. It is the balance remaining after you have made one or more monthly payments. Each payment includes two components:
- Interest: The cost of using borrowed money.
- Principal amortization: The portion of the payment that directly reduces the loan balance.
With each installment, the outstanding principal decreases, although the ratio of interest to amortized principal varies over time.
How outstanding capital works
The most common system in Spain is the French amortization system, which is characterized by constant installments throughout the life of the loan. However, within those installments:
- At the beginning of the loan: Most of the payment goes to interest, and only a small portion reduces the outstanding principal.
- As the term progresses: Interest decreases and a greater proportion of the installment is used to amortize the principal.
Practical example:
- Loan amount: €150,000.
- Interest rate: 3%.
- Term: 25 years.
In the first installments, 70% of the payment can be used for interest and only 30% for principal. In the last installments, this proportion is reversed.
Factors affecting outstanding capital
- Amortization period:
- Longer terms have lower initial payments, but the outstanding principal decreases more slowly.
- Interest rate:
- A high rate means that more of each installment goes to interest, slowing down principal reduction.
- Early redemption:
- Making additional payments directly reduces the outstanding principal, which reduces future interest.
How to reduce outstanding capital faster
- Early repayment:
You can make additional payments to the bank to reduce the outstanding principal. This can be done in two ways:- Reduce the term: You keep the monthly payment, but reduce the duration of the loan.
- Reduce the installment: You keep the term, but reduce the monthly amount.
- Tip: Prioritize the extra payments in the first years of the mortgage, when interest represents a higher proportion of the installments.
- Negotiate conditions with the bank:
If interest rates go down, you could renegotiate the contract or subrogate your mortgage to another entity with better conditions. - Increase the frequency of payments:
Making biweekly or weekly payments reduces the outstanding principal more quickly and reduces accrued interest.
Benefits of reducing outstanding capital
- Less interest accrued: The faster you reduce your outstanding principal, the lower the total cost of your mortgage.
- Greater financial peace of mind: By reducing the debt balance, the risk of facing financial difficulties decreases.
- Flexibility to renegotiate terms: Lower outstanding principal can make it easier to get better terms if you decide to refinance.
How to calculate outstanding capital
You can calculate the outstanding principal at any time using financial formulas, online simulators or tools such as Excel.
Formula for calculating the outstanding principal:
Where:
- CP: Capital pending.
- P: Initial loan principal.
- r: Monthly interest rate (annual rate divided by 12).
- n: Total number of payments (term in years multiplied by 12).
- p: Number of payments made.
Practical example:
- Initial capital: €150,000.
- Annual interest rate: 3% (0.03).
- Monthly interest rate: r=0.03/12=0.0025r = 0.03 / 12 = 0.0025r=0.03/12=0.0025.
- Term: 25 years (n=25×12=300n = 25 times 12 = 300n=25×12=300).
- Payments made: 5 years (p=5×12=60p = 5 times 12 = 60p=5×12=60).
By applying the formula, you can determine how much remains to be paid at any given time.
Useful tools to control outstanding capital
- Online simulators:
Many banks in Spain offer simulators on their websites to calculate the outstanding capital. - Mobile applications:
Tools such as Fintonic or Excel allow you to make a detailed follow-up. - Bank statements:
Banks usually provide annual or quarterly updates on the status of your mortgage.
Conclusion: Take control of your unpaid capital
Outstanding principal is a key indicator for managing your mortgage effectively. Reducing it faster not only lowers the total cost of the loan, but also gives you greater flexibility and financial peace of mind. With strategies such as early amortization and the use of financial tools, you can optimize your mortgage and save thousands of euros in the long run.
Would you like to know how to calculate your monthly mortgage payment? click here.
