A 7% Mortgage Costs 112% and Your Deposit Barely Beats Inflation

A 7% mortgage does not cost 7%. Over 25 years, a $300,000 loan at that rate demands $636,101 in total repayment. The interest alone - $336,101 - exceeds the original principal. For every $100 borrowed, you hand the bank $112 in interest on top. The nominal rate sits on page one of the contract. The real cost hides in the amortization schedule that nobody reads.

That number shifts dramatically depending on three decisions you make before signing: how long you borrow for, which instalment type you choose, and what you do with the money you are not putting toward debt. This article runs the arithmetic on all three.

The instalment decision most borrowers skip

Banks default to fixed instalments. The monthly payment stays the same for the entire term - predictable, safe, easy to budget around. But predictable is not the same as cheap.

With declining instalments, the capital portion stays constant and only the interest shrinks. The first payment is higher, the last one is lower, and the total interest bill drops by 20-25%.

Here is the exact comparison on a $300,000 mortgage at 7% for 25 years:

The trade-off is front-loaded pain. Your first instalment jumps 30% higher. But by month 108 (year 9), the declining payment drops below the fixed one and keeps falling from there.

And the term itself? Shortening a 30-year mortgage to 20 years on the same $300,000 at 7% raises the monthly payment from $1,996 to $2,326 - only $330 more. But total interest drops from $418,527 to $258,215. That extra $330 per month saves you $160,312 and a decade of payments.

$200 a month for 20 years turns into $104,000 of free money

While a mortgage charges you interest, a savings account earns it. The difference is compounding - interest on interest - and the effect is nonlinear. Small amounts left alone for long periods grow in ways that feel mathematically unfair.

$10,000 at 7% compounded monthly for 20 years becomes $40,088. The initial deposit quadruples without a single additional contribution. Add $200 per month on top and the final balance jumps to $144,573. Of that total, only $58,000 came from your pocket. The remaining $86,573 is compound interest - money your money earned.

The Rule of 72 gives a shortcut: divide 72 by the annual rate to estimate doubling time. At 7%, your money doubles in roughly 10.3 years. At 5%, it takes 14.4 years. At 10%, just 7.2 years.

The table below shows why starting matters more than the amount:

Same total deposited in the first two rows ($180,000), radically different outcomes. The 30-year saver earns nearly three times as much interest despite contributing the same total amount. Time beats intensity.

A 5% deposit earns 4.25% after tax and 0.75% after inflation

A fixed-term deposit is the opposite of compound growth. It is safe, predictable, and modest. You lock in a rate, wait, collect your interest, and move on.

On $10,000 at 5% for 12 months (paid at maturity):

• Gross interest: $500
• Withholding tax (15%): -$75
• Net interest: $425
• Effective annual rate (net): 4.25%

Now subtract inflation. At 3.5%, the purchasing power of $10,000 erodes by $350 over the same year. Your real gain is not $425 - it is $75. The deposit beats inflation, but barely.

At 5% inflation instead of 3.5%, the real return goes negative. Your $10,425 buys less than the $10,000 did a year ago. The deposit preserved your nominal balance while your purchasing power quietly shrank.

Does that mean deposits are pointless? No. They serve a specific purpose:

• Emergency funds - money you might need in 6 months should not be in the stock market
• Short-term parking - a down payment closing in 90 days needs guaranteed preservation
• Rate-lock insurance - when rates are falling, a 12-month CD locks in today's yield

The mistake is treating a deposit as a wealth-building tool. It is not. For time horizons over 3 years, compound interest in a diversified portfolio has historically outperformed deposits by a wide margin.

The arithmetic nobody runs

Most people think of these three instruments - loans, deposits, and investments - as separate decisions. They are not.

Consider this: a $300,000 mortgage at 7% with fixed instalments costs $112 in interest per $100 borrowed. A compound interest investment at the same 7% returns $287 per $100 over the same 25 years. The spread between the cost of debt and the return on investment is where wealth either accumulates or leaks.

Or consider the deposit dilemma. Parking $50,000 in a 5% deposit for a year yields $2,125 net. The same $50,000 compounded at 7% for 20 years produces $193,484. The deposit earns you coffee money. The investment builds a retirement.

None of this means you should skip the deposit and put your emergency fund into index funds. Risk tolerance, time horizon and liquidity needs all matter. But the numbers should be visible before you decide - not after.

Tools discussed in this article

More tools from Finance

Check for a specific amount

• Compound interest $10,000 - growth over time
• Compound interest $50,000 - larger principal
• Loan payment $200,000 - monthly payment
• Deposit $10,000 - savings return