China mortgages: equal principal vs equal installment repayments
When you take a mortgage in China you choose between two repayment methods. How each works, which costs less and how provident fund loans fit in.
When you take out a home loan in China, the bank will ask you to choose a repayment method. The two options, equal installment (等额本息) and equal principal (等额本金), can lead to quite different monthly payments and total interest. Understanding them helps you choose the one that fits your budget. This guide compares equal principal vs equal installment mortgages in China, with a worked example, and explains commercial, provident fund and combination loans.
Equal installment repayment
With equal installment repayment, your monthly payment stays the same for the whole loan, as long as the interest rate does not change. In the early years, most of each payment goes towards interest; over time, the share going to principal grows. The fixed payment makes budgeting easy and keeps the early payments lower, which is why it is the most common choice.
Equal principal repayment
With equal principal repayment, you repay the same amount of principal every month, plus interest on the remaining balance. Your first payments are higher, but they fall steadily as the balance shrinks. Because you repay principal faster, you pay less total interest over the life of the loan. It suits people with strong current income who can handle the higher early payments, or who expect their income to fall later.
Worked example: CNY 1 million over 30 years at 3.5%
Under equal installment, the payment is about CNY 4,490 every month for 30 years, and total interest comes to roughly CNY 616,600.
Under equal principal, you repay about CNY 2,778 of principal each month plus interest. The first payment is about CNY 5,694, and each payment after that is about CNY 8 lower, until the last one is about CNY 2,786. Total interest comes to roughly CNY 526,500, about CNY 90,000 less than equal installment.
The trade-off is clear: equal principal saves a substantial amount of interest, but the first payment is about CNY 1,200 a month higher. If that extra amount would strain your budget, equal installment is the safer choice.
Which repayment method to choose
If cash flow is tight or you want predictable payments, equal installment is easier to manage. If you can afford higher payments now and want to minimise interest, equal principal saves money. If you plan to repay early anyway, the gap between the two narrows, because you will pay less interest either way. You can use our loan calculator to see the equal installment payment for your loan size and rate.
Commercial, provident fund and combination loans
A commercial loan comes from a bank at a rate based on the five-year loan prime rate. A housing provident fund loan uses the provident fund system and usually charges a lower rate, but has borrowing limits that depend on your contributions and your city. Many buyers use a combination loan (组合贷), borrowing as much as possible through the provident fund and the rest commercially. Our housing provident fund guide explains eligibility.
Rate changes and early repayment
Most mortgages have rates that reset periodically based on the loan prime rate, so your payment can change when the benchmark moves; see our guide to the loan prime rate. Banks generally allow early repayment, which reduces total interest. You can usually choose to shorten the loan term or reduce the monthly payment; shortening the term saves more interest. Check whether your bank charges any fee or requires advance notice.
Before you apply
Banks check your credit report and income before approving a mortgage, so review your report a few months ahead; see our guide to your personal credit report in China. Keep an emergency fund in an accessible place, such as a money market fund, so that a temporary loss of income does not lead to missed payments.
Frequently asked questions
Which is cheaper, equal principal or equal installment?
Equal principal costs less total interest, but its early payments are higher.
Why do most people choose equal installment?
Because the payment stays the same and the early payments are lower, which makes budgeting easier.
Can I repay a mortgage early in China?
Banks generally allow early repayment, though some require notice or charge a fee.
Sources
This article is general information, not financial advice.