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GLOSSARYTERMS AS A CREDIT DESK USES THEM

Amortisation

What is amortisation on a term loan, and why do banks insist on it?

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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED

// THE SHORT ANSWER

Amortisation is the scheduled repayment of principal across a loan's life, usually inside a level monthly instalment covering principal and interest together. It does two jobs at once: the bank's exposure falls in step with the ageing of whatever was financed, and the borrower's total interest cost falls dramatically, because interest is charged on the outstanding balance and amortisation roughly halves the average balance over the term. On a five-year loan, full amortisation can cost close to half the total interest of an interest-only structure with principal repaid at maturity.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

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