The Re-Amortisation Trap: Total Cost And Ending Balance

A refinance replaces one loan with another. The new loan comes with a new amortisation schedule, and that schedule starts at the beginning — the part where the balance is at its largest and each payment is mostly interest.

This is not a hidden charge and nobody conceals it. It is simply arithmetic that no payment-led document has any reason to show you. The consequence is that a refinance can lower the monthly payment and raise the total cost simultaneously, and both statements will be true.

What an amortisation schedule actually does

A fixed-rate amortising loan divides each payment between interest accrued on the current balance and principal reduction. Because interest is charged on the balance, and the balance is highest at the start, early payments are dominated by interest and retire very little principal. As the balance falls, the interest component shrinks and the principal component grows — slowly at first, then quickly.

The practical effect: the years of a mortgage are not equivalent. A borrower well into a long loan has reached the productive part of the schedule, where a large share of every payment reduces what they owe. That position was purchased with all the interest-heavy years that preceded it.

Refinancing sells that position back. The new schedule begins again at month one.

Here is how the illusion is generated. Take a household several years into a thirty-year mortgage. They refinance into a fresh thirty-year term. The remaining balance is now spread over 360 months instead of the 300-odd that remained, and the payment falls.

The payment fell for two separable reasons, and they should never be conflated:

• Term extension. The same principal divided across more instalments. This lowers the payment and raises total interest.
• Rate change. If the new rate differs from the old, that moves the payment too — in either direction.

A refinance presented as "your payment drops by X" bundles these together. Separate them and the decision becomes legible. A rate improvement is a genuine economic gain. A term extension is a rescheduling, and it is paid for.

The correct scoring basis

Score any refinance the way we score the whole three-column comparison: total paid over your horizon, plus the ending balance at that horizon.

Ending balance is the term that catches re-extension. Two structures can produce identical total payments over seven years while leaving you owing materially different amounts at the end — and the one that leaves you owing more has not saved you anything, it has deferred. Adding the ending balance to total paid makes the two comparable on one line. The full construction is at the three-column comparison over a holding period.

A worked example, with stated assumptions

Illustrative and rate-free. Substitute your own quotes and schedules.

Assume a borrower eight years into a 30-year mortgage, with 22 years and a balance of $240,000 remaining. Assume two offers, both raising $40,000 cash:

• Offer 1: new balance $280,000 (plus financed costs), 30-year term.
• Offer 2: new balance $280,000 (plus financed costs), 20-year term, at whatever rate is quoted for that term.

Set a horizon of 8 years. For each offer compute:

Total paid = monthly payment × 96 Ending balance = balance from the new schedule at month 96 Score = total paid + ending balance

Offer 1 will show the lower payment; that is arithmetically certain, since the same principal is spread over 360 months instead of 240. Offer 2 will show the lower ending balance, because a 20-year schedule retires principal faster from the outset. Which score is lower depends on the two quoted rates, and you cannot know it without doing the sum with your own figures.

That is the entire point. The payment comparison has a predetermined winner. The score comparison has to be computed, and it is the one that reflects what the money actually costs.

Run the same score at a second horizon — say 15 years — before you decide. If the ranking holds at both, you have a robust answer.

The remedy: do not re-extend

The straightforward defence against re-amortisation is to refinance into a term no longer than what remains on the current loan. If 22 years remain, price 20-year and 15-year offers alongside the 30-year one, and score all three.

Two cautions. First, lenders often quote different rates by term; take each quote as quoted rather than assuming the rate carries across. Second, and more importantly, a shorter term means a higher required payment, and a required payment is a contractual obligation on debt secured against your home. Test it against a deliberately bad year — reduced income, a large repair — before you commit to it. The same sustainability discipline applies to second liens and is set out at term length and the total-interest trade.

If the shorter term's payment fails the bad-year test, take the longer term and overpay voluntarily where the loan's provisions permit it cheaply. You keep the flexibility and capture most of the benefit.

What we would do

Ask every lender for the amortisation schedule, not the payment summary, and get the offer on the standardised Loan Estimate so the cost lines sit where you can compare them. Compute total paid plus ending balance at your own horizon for every offer, including the do-nothing case. Then decide.

And remember the alternative that avoids the reset entirely: leaving the first mortgage alone and raising the cash behind it as a second lien, with the consequences described at second-lien position in a refinance or sale. This is reporting on mechanics, not personalised advice.