Fixed Payment vs. Fixed Principal: Which Saves More?
When taking out a mortgage, banks typically offer two repayment methods. Understanding their differences can save you tens of thousands in interest.
Equal Payment (Fixed Monthly Amount)
You pay the same amount every month. The principal portion increases while the interest portion decreases over time.
Monthly payment formula:
M = P × r(1+r)^n / [(1+r)^n - 1]
Pros: Stable monthly pressure, easier budgeting, ideal for salaried workers.
Cons: Higher total interest, mostly interest in early years.
Equal Principal (Decreasing Monthly Amount)
You pay the same principal each month plus interest on the remaining balance, so payments decrease over time.
Monthly payment formula:
M = (P/n) + (Remaining Balance × r)
Pros: Lower total interest, gets easier over time, good for high earners.
Cons: Higher initial payments, first month is the heaviest.
Quick Comparison ($1M, 30 years, 3.95%)
| Item |
Equal Payment |
Equal Principal |
| First Payment |
~$4,740 |
~$6,069 |
| Last Payment |
~$4,740 |
~$2,794 |
| Total Interest |
~$706K |
~$593K |
| Interest Saved |
Equal Principal saves ~$113K |
Early Repayment Strategy
If you plan to pay off early, these strategies maximize interest savings:
- Equal Payment: Best within first 1/3 of term. Early years are interest-heavy.
- Equal Principal: Best within first 1/2 of term.
- Shorten term over reducing payment. Same prepayment amount saves more interest when shortening the term.
- Watch for prepayment penalties. Some banks charge 1-3 months interest.
Frequently Asked Questions
Will my interest rate change?
If you chose a floating rate tied to market benchmarks, it adjusts annually. Fixed rates remain constant for the entire term.
Why do banks recommend Equal Payment?
Banks earn more interest from it. Also, stable payments mean lower default risk. But choose based on your situation, not the bank's preference.
Are calculator results exactly what the bank charges?
The math is identical, but actual payments may differ slightly due to day-count conventions, payment dates, and rate adjustment timing. Always verify with your bank contract.