The French amortization system: lower payment or shorter term?

What is the French amortization system?

Almost every mortgage in Spain -and in most countries- uses the French amortization system: the monthly payment stays exactly the same for the entire life of the loan (as long as the interest rate doesn't change), but the split between interest and principal shifts every month.

The payment formula is:

Payment = P × r × (1+r)ⁿ / [(1+r)ⁿ − 1]

Where P is the outstanding principal, r is the monthly interest rate (the annual TIN divided by 12), and n is the number of remaining months.

Virtually every Spanish bank uses this system, for both fixed and variable mortgages. On variable mortgages, the payment is simply recalculated with this same formula every time the Euríbor is reviewed.

Why you pay almost all interest at the start

The key to the French system is that interest is calculated on the outstanding principal, which is at its highest at the start of the loan. Since the total payment stays constant, a larger share of that payment goes toward interest early on; as the loan progresses, that share gradually flips.

Example with a €150,000 loan over 25 years (300 months) at 3.5% TIN. The fixed monthly payment is €750.94 for the entire life of the loan. Here's how that payment splits between interest and principal over time:

In the first month, more than half the payment is pure interest. It's not until month 60 (year 5) that the split evens out to roughly 50/50. From there, each payment pays down more principal than the last, until in the final years almost the entire payment is principal.

This has an important consequence many people don't anticipate: if you sell the home or pay off the mortgage in the first few years, you'll have paid a lot of interest and built up little real equity, no matter how faithfully you've made your payments.

Other amortization systems, for context

• German system: the same amount of principal is repaid every month, so the total payment (principal + interest) decreases over time: it starts high and falls. Barely used in Spain for residential mortgages.
• American system: only interest is paid during the loan, with the full principal returned at the end. Not used for residential mortgages in Spain.

The French system is, by far, the standard in the Spanish mortgage market.

Early repayment: lower the payment or shorten the term?

When you decide to make an early repayment -putting in extra money to reduce the outstanding principal-, the bank lets you choose between two options:

• Lower the payment: the term stays the same, but the monthly payment drops, because the bank recalculates a smaller payment for the same number of remaining months.
• Shorten the term: the monthly payment stays the same as before, but with less principal outstanding, the loan gets paid off sooner than planned.

The question most mortgage holders ask themselves is which one pays off more.

The short answer: shortening the term almost always saves more total interest

The reason is simple: by shortening the term, you keep paying the same (higher) payment on a principal that falls faster, so your debt is exposed to interest for less time. By lowering the payment, you keep paying for the same number of months, just with smaller payments, so you stay exposed to interest for a longer total time.

A numerical example with the same loan

Let's continue with the €150,000 loan over 25 years at 3.5% TIN (initial payment: €750.94). Say you reach year 5 (month 60) having faithfully made your payments, with an outstanding balance of €129,480.61, and you decide to make an early repayment of €10,000.

If you make no early repayment at all, the total interest paid over the life of the loan would be €75,280.61.

Option A - Lower the payment (keep the remaining 240 months, recalculate a smaller payment):

• New payment: €692.94/month (€58/month lower than the original €750.94)
• Total interest paid over the life of the loan: €71,361.57
• Interest savings vs. no early repayment: €3,919

Option B - Shorten the term (keep the €750.94/month payment, let the loan get shorter):

• The loan is paid off in 215 months instead of 240 (you save 25 months, about 2.1 years)
• Total interest paid over the life of the loan: €65,882.75
• Interest savings vs. no early repayment: €9,397.86

Difference between the two options: €5,478.82 more in interest savings by choosing to shorten the term, with the exact same €10,000 extra repayment.

So is shortening the term always better?

In terms of pure total cost, yes: with the same amount repaid early, shortening the term almost always saves more interest than lowering the payment. But there are legitimate reasons to prefer lowering the payment:

• If your priority is easing your monthly budget -say, because your income situation has changed or you want more breathing room each month-, lowering the payment makes sense even if you save less in total interest.
• If you live in Euskadi and benefit from the regional (foral) mortgage deduction, keep in mind the deduction is calculated on the payments made each year, up to the €8,500-per-person limit. If you lower the payment, you contribute less each year and may not reach the full deductible limit; if you shorten the term instead, you keep the higher payments until the loan ends, which can help you maximize the deduction for more years. Check this with the mortgage calculator, which calculates the impact on the regional deduction.
• If you have no need for monthly liquidity and your goal is to minimize the total cost of the loan, shortening the term is the mathematically superior option.

Our mortgage calculator models exactly the term-shortening scenario: if you add an annual extra contribution, the scheduled payment stays the same and the principal falls faster, so the loan finishes sooner without you having to renegotiate anything with the bank.

Summary

If you want to simulate your own case -with your outstanding principal, interest rate, and extra contribution-, use our mortgage calculator, which includes the full month-by-month amortization schedule.