Let's get the conclusion out of the way first: the "unit price" of interest is exactly the same under both repayment methods — in each case the interest for the month is your current outstanding principal times the monthly rate. Total interest differs not because one method is cheaper, but because equal principal repays more principal early on, so you owe less, and less debt naturally generates less interest.
Once that clicks, everything else falls into place.
What each method is actually doing
Equal instalment (annuity): the total monthly payment is fixed. The bank works out one payment figure and you pay the same amount every month for 30 years. Early on, most of it is interest and little is principal; over time the principal share rises.
Equal principal: the principal each month is fixed (total principal ÷ number of periods), and the month's interest is added on top. Because the principal keeps falling, the payment declines month by month — highest in the first month, lowest in the last.
What they share: interest always equals "remaining principal × monthly rate". The only difference is how fast the principal is repaid.
Working through the numbers
Assume a loan of 1,000,000, an annual rate of 3.1% (monthly rate about 0.2583%), over 30 years (360 periods).
| Item | Equal instalment | Equal principal |
|---|---|---|
| First month | about 4,270 | about 5,361 |
| Last month | about 4,270 | about 2,785 |
| Payment trend | Constant | Falls about 7 per month |
| Total interest | about 537,000 | about 466,000 |
| Interest difference | Equal principal pays about 71,000 less | |
The numbers are clear: equal principal saves roughly 71,000 in total interest, at the cost of a first-month payment about 1,090 higher, sustained for a considerable stretch.
Looked at another way: that 71,000 isn't "saved" — it's bought with "1,090 more per month early on". What you're choosing is to repay faster, not to borrow more cheaply.
The key divergence: early repayment changes things
This is the part most often overlooked, and for many people the most important.
If you plan to hold the loan for the full 30 years, the difference between the two methods is that 71,000. But if you plan to repay in full or sell within 5 to 10 years, the picture changes entirely:
- Equal instalment repays mostly interest early on, so very little principal goes down. After 5 years you'd have paid about 256,000 in total, of which only about 90,000 was principal, leaving 910,000 outstanding.
- Equal principal repays principal faster, so after 5 years about 167,000 of principal is repaid, leaving about 833,000 outstanding.
That means if you repay in full after 5 years, the remaining balance under equal principal is about 77,000 lower — you've already put that much extra principal in. That money isn't a gain; it's money you handed the bank early.
So the test comes down to: do you have a better use for that extra money?
Three questions to ask yourself
Question one: is the early payment affordable?
A first month of 5,361 under equal principal versus 4,270 under equal instalment is a gap of over a thousand. If that leaves every month tight, don't force yourself into equal principal. A mortgage runs 30 years, and the risk of a cash-flow break in the early years far outweighs the interest difference.
Many banks require monthly payments to be covered twice over by income. Choosing equal principal may not even clear approval. That's a very real constraint.
Question two: how long do you plan to hold it?
The longer you hold, the more equal principal's interest saving matters. If you might sell or move within 3 to 5 years, the practical difference between the two shrinks a lot — you don't get the benefit of long-term interest savings, but you have already overpaid principal up front.
Question three: does your money have another use?
This is the crux. If the mortgage rate is just over 3% and you have a stable investment channel yielding 4%+, keeping the money in hand is the better deal and you should choose the lower payment of equal instalment. Conversely, if you have spare cash sitting in a current account, repaying early is effectively a risk-free 3% return, and equal principal (or simply overpaying principal) is worth more.
A few common misconceptions
- "Equal principal is the better deal" — not accurate. The unit price of interest is the same; only the repayment rhythm differs. Whether it's "better value" depends on your opportunity cost, not on the method itself.
- "Equal instalment means the bank makes more off you" — the rate is identical under both. When a bank recommends equal instalment it's often simply because approval is easier (lower payment, lower income-coverage requirement), not necessarily to squeeze you.
- "Early repayment should always shorten the term" — not necessarily. Shortening the term saves more interest but leaves the payment unchanged and possibly still tight; reducing the payment improves cash flow immediately. These are two different goals; pick according to your actual need.
- "The sooner you repay early the better" — broadly true, since interest is charged on the remaining principal, so the earlier you reduce principal the more future interest you save. But check whether the bank charges an early repayment penalty (commonly a percentage if you repay within the first year, or a cap on how many times a year).
Why comparing total interest alone misleads
By now you can probably see it: comparing total interest on its own is misleading, because the two methods tie up your money for different lengths of time.
The rigorous approach is to discount the cash flows to a single point in time and compare. But for an ordinary buyer that's overkill — the three questions (payment affordability, holding period, other uses for the money) are enough in practice.
One more caution: the numbers above are a static calculation at a fixed rate. In reality the LPR adjusts and your payment changes with it. After the repricing date (usually 1 January or the disbursement anniversary), the payment is recalculated at the new rate.
Running it yourself is the most reliable route
Articles online use generic assumptions, and your own situation (loan amount, rate, term, whether it's a combined loan) can change the conclusion substantially. Run the comparison twice yourself:
Use the mortgage calculator once for equal instalment and once for equal principal, and look at three numbers: how much the first payment differs, how much the total interest differs, and how much the remaining principal differs at the end of the period you actually plan to hold. That third number often drives the decision most, yet most people never calculate it.
Everything is computed locally in your browser, so there's no privacy concern even with real loan figures.
If you also want to know how much monthly payment your take-home pay can support, pair this with the income tax calculator to work out your net salary before deciding. Keeping the payment within 40% of take-home pay is a reasonably safe range.