Equal Principal vs Interest Mortgage: Grace Period Risks

The "equal principal and interest" mortgage repayment method averages total principal plus interest across every installment, maintaining fixed monthly payments suitable for budgeting, though cumulative 30-year interest is higher; the "equal principal" method repays a fixed amount of principal monthly with interest declining as remaining balance decreases, meaning that while year-one payments are highest, a 30-year NT$10,000,000 mortgage at 2.2% annual interest saves approximately NT$360,000 to NT$390,000 in total interest under equal principal compared to equal principal and interest. Furthermore, while applying for a 3 to 5-year interest-only grace period substantially lowers initial payments, once the grace period ends, remaining principal is compressed into the shortened remaining term, sharply increasing monthly payments and total interest.

Reminder: Bank mortgage contracts typically stipulate a 2 to 3-year prepayment restriction period (lock-in period); paying off substantial principal early or refinancing during this lock-in period incurs prepayment penalties of 0.5% to 1%. It is advisable to commence accelerated principal repayments after the lock-in period expires.

1. Equal Principal and Interest vs. Equal Principal: Monthly Payments and Total Interest

When applying for a home purchase loan, alongside preparing Deed Taxes, Stamp Duties, and Escrow Fees, choosing your repayment structure impacts cash flow for the next 20 to 40 years. Taiwan banks offer two primary amortization methods (illustrated with NT$10,000,000 principal, 30-year term / 360 installments, 2.2% annual interest, and zero grace period):

In practice, over 80% of buyers select equal principal and interest initially to alleviate immediate moving and renovation burdens; once past the 2 to 3-year lock-in period, directing annual bonuses toward partial principal repayments achieves identical interest-saving and term-shortening benefits.

2. What Is a Mortgage Grace Period? Beware the Post-Grace Payment Surge

A mortgage grace period refers to an initial 2 to 5-year phase where borrowers pay interest only without repaying loan principal. While intended to grant financial breathing room for home decorating and furnishing expenses, using grace periods as leverage to purchase unaffordable properties triggers two major financial pitfalls:

• Pitfall 1: Monthly payments more than double immediately after grace period expires. Because zero principal was repaid during the grace period, the entire NT$10,000,000 principal is compressed into the remaining term. For a 30-year NT$10,000,000 loan at 2.2% (equal principal and interest), payments during a 3-year grace period are only approx. NT$18,333 monthly; however, starting in year 4, remaining principal must be repaid over the remaining 27 years (324 installments), causing monthly payments to surge immediately to approx. NT$40,985 (under a 5-year grace period over 25 years, payments jump to NT$43,367).
• Pitfall 2: Total 30-year interest expenses increase by hundreds of thousands of dollars. Because the principal balance remains at the full NT$10,000,000 ceiling throughout the initial 3 to 5 years, using a 3-year grace period adds approx. NT$280,000 in interest compared to zero grace period, while a 5-year grace period adds approx. NT$470,000.

If planning future upgrades as family size grows, consider loan transitions and grace periods alongside House and Land Tax Holding Period Rates on property sales and Owner-Occupied Home Replacement Tax Refunds.

3. Preferential Housing Loans for Youth (Youth Home Loan) Standards

Administered by eight state-owned banks (Bank of Taiwan, Land Bank of Taiwan, Taiwan Cooperative Bank, First Bank, Hua Nan Bank, Chang Hwa Bank, Mega Bank, and Taiwan Business Bank) under Ministry of Finance supervision, the Youth Preferential Housing Loan is the primary policy mortgage for first-time homebuyers. Review these core requirements before applying:

Frequently Asked Questions

Can I switch from equal principal and interest to equal principal midway?

Most banks permit switching amortization methods during the loan term, though it is treated as a contractual alteration requiring supplemental agreements and administrative amendment fees; banks will re-verify debt-to-income ratios for higher payments. A more flexible strategy is keeping equal principal and interest while making periodic voluntary lump-sum principal prepayments via online banking without penalty once past lock-in terms.

Do monthly payments automatically decrease when prepaying partial mortgage principal?

When making lump-sum prepayments after the lock-in period, banks offer two adjustment options: first, "retaining loan term while reducing monthly payments," which is the standard default setting reducing future installments; second, "retaining monthly payment amounts while shortening total remaining term." Confirm preferred adjustment options with your lending bank prior to remitting funds.

Can I apply to extend the mortgage grace period once it expires?

Standard mortgage grace periods are generally capped at 2 to 3 years (up to 5 years under the Youth Home Loan); banks do not extend terms unconditionally upon expiration without justifiable documentation or collateral revaluation, strictly bound by Central Bank selective credit controls (e.g. zero grace period for second residential mortgages in designated regions). Refinancing elsewhere to prolong grace periods incurs substantial deed fees, appraisal fees, and potential penalties without guaranteed approval.

Why did the bank only approve a 30-year term when I applied for a 40-year mortgage?

While policy loans and select private bank programs allow up to 40 years, credit evaluation policies maintain two rules: first, "borrower age plus loan term must not exceed 75 (or 80)" (e.g. a 42-year-old buyer qualifies for 30 to 33 years maximum); second, "building age plus loan term must not exceed 50 (or 60)," making 40-year terms difficult for properties aged 25 years or older.

Last updated: 2026-11-01

Compiled by SOSfix from official open data for general reference; consult administrative authorities or financial lending institutions for specific cases.

Sources

• National Treasury Administration, Ministry of Finance: State-Owned Banks Youth Home Loan Principles and FAQ (Verified 2026-11-01): Guidelines on maximum NT$10M loan limit, 40-year term (including 5-year grace period), and owner-occupied verification audits.
• Laws & Regulations Database: Banking Act & Mandatory Terms of Standard Individual Mortgage Contracts (Verified 2026-11-01): Amortization definitions, prepayment restriction terms, and consumer rights protection regulations.