Final answer:
Installment payments on a mortgage usually cover more interest in the early stages and progressively shift to pay down more of the principal over time. The balance and interest decrease as payments are made, changing the proportions allocated to each. Factors like interest rates, borrower's payment history, and economic conditions affect the value and structure of the loan.
Step-by-step explanation:
When making installment payments on a mortgage payable, the common structure is that earlier payments consist of a higher proportion of interest and a smaller proportion of principal. The 'principal' refers to the original sum borrowed, while interest is the cost charged by the lender for borrowing that sum. Over time, as you keep paying your installments, the balance owed decreases, and consequently, the interest calculated on the remaining principal also decreases. This means that as you progress through the life of the loan, more of your payment is allocated towards the principal, reducing the debt balance faster.
It is important to understand that if interest rates rise, a loan with a lower fixed interest rate becomes less attractive in the market. Moreover, if a borrower has a history of late payments or the economic interest rates have fallen, the perceived value or the amount one might be willing to pay for the loan changes. Lenders also assess a borrower's ability to repay, which can be indicated by their credit history or in the case of a firm, its profitability record.
In the scenario where a borrower only pays the interest portion of the mortgage without reducing the principal, the debt will never decrease, which is why minimum payments need to adequately cover both principal and interest to ensure the mortgage is paid off over time. Additionally, with an adjustable-rate mortgage, the interest rate may change in accordance to market conditions, affecting the allocation between interest and principal over the loan term.