Annuity

An annuity mortgage is a repayment plan where you pay the same amount each month. This fixed amount consists of a portion for interest and a portion for principal. If your interest rate changes, the monthly payment is reset.

Interest and repayment:
Because you repay an annuity mortgage during the term, the distribution between the interest and repayment portions changes. An annuity mortgage is fully repaid at the end of the term.

At the beginning of your mortgage term—when you first take it out—the interest portion is greater than the principal portion. The amount borrowed gradually decreases as you repay the mortgage, so you pay less and less interest.

With a 30-year annuity mortgage, you’ll have paid off half the loan after about 18 years. The remaining balance is repaid over the last 12 years. In the final years, the principal portion is proportionally larger, while the interest portion is lower.

Mortgage interest deduction.
When you take out a mortgage loan, you are entitled to mortgage interest deduction under certain conditions. One of those conditions is that you take out an annuity or linear mortgage. With this repayment method, you meet that requirement in any case.