Loans Amortization with Payments Constant in Real Terms

Abstract

In this paper we present the so-called debts amortization with payments constant in real terms. In this kind of loan, the payments are increasing according to the Consumer Price Index (CPI). Thus, the borrower assigns the same proportion of his/her salary to the discharge of the loan, without reducing his/her purchasing power due to this increase, but with the advantage of a minor first payment for the total amortization of the principal over the agreed loan period. We will use capitalization or discount functions with the inflation implicit and we will study the inflation rate dependence on the interest rate; taking into account that there exists a strong correlation between both magnitudes, it is expected that the final loan duration is not widely modified with respect to the initially agreed one. This work presents the theoretical treatment and some practical applications of this new proposed financial product, especially, for mortgage amortization.