Fixed vs. Reducing Balance Loan: Which Repayment Method Suits You?

When taking out a mortgage or personal loan, you'll usually be asked to choose a repayment method. Fixed installment, reducing balance, and bullet (interest-only) repayment each produce very different monthly payments and total interest costs. Here's how they compare — with real numbers.

The Three Main Repayment Methods

① Fixed Installment (Annuity / Equal Total Payment)

You pay the same total amount every month throughout the loan term. Early payments are mostly interest; later payments shift toward principal. The most common method for mortgages and personal loans.

② Reducing Balance (Equal Principal)

You repay the same principal amount every month, while the interest portion decreases as the outstanding balance falls. Monthly payments start high and decrease over time. Total interest paid is less than the fixed installment method.

③ Bullet / Interest-Only Repayment

You pay only interest each month and repay the entire principal as a lump sum at the end of the term. Monthly payments are minimal, but total interest is the highest. Common for short-term business loans or bridge financing.

Side-by-Side Comparison ($100,000 / 4.5% / 20 years)

Method	First Payment	Last Payment	Total Interest
Fixed installment	$632	$632	$51,836
Reducing balance	$792	$419	$45,719
Bullet	$375	$100,375	$90,000

The reducing balance method saves about $6,100 in interest compared to the fixed installment method on these terms. The bullet method costs nearly double.

Which Method Is Right for You?

Choose Fixed Installment if:

You want predictable monthly expenses for budgeting
Your income is stable but not especially high
You're taking a long-term mortgage and value simplicity

Choose Reducing Balance if:

You have higher income now and expect it to decrease later
Minimizing total interest is your priority
You can handle the higher initial payments

Choose Bullet if:

You expect a large lump sum at the end (e.g., property sale, investment maturity)
You need to maximize monthly cash flow in the short term
It's a short-term bridge loan or business financing

💡 The higher the interest rate, the bigger the difference. At 4.5% the saving is ~$6K; at 7% it exceeds $10K on a $100K loan. Use the calculator below to compare with your exact figures.

Early Repayment

If you receive a windfall during the loan term, making a lump-sum early repayment reduces your outstanding principal and significantly cuts future interest. Be sure to check whether your lender charges an early repayment fee — typically applicable within the first 1–3 years.