Principal is not a cost

Short answer #

Principal uses cash but reduces debt and increases net wealth. Interest and fees are finance cost; ownership comparisons must not count principal again in addition to the lower balance.

Important variables #

• Effective rate and fees
• Same comparison horizon
• Tax, cost and risk
• Remaining debt or ending wealth

Worked example #

Of a €1,500 mortgage payment with €900 interest and €600 principal, €900 is finance cost; €600 converts cash into equity.

Break-even: What changes the result? #

Test the main driver as a cautious, central and optimistic range. Also check whether the ranking reverses at a crossover or remains robust across the range.

Common mistakes #

• Equating low payment with low cost
• Equating certain interest saving with uncertain return
• Mixing nominal and real values

Sources & assumptions

• European Central Bank — Monetary policy decisions, 23 July 2026 (2026-08-17)
• RATIOXA — Methodology and formulas (2026-08-17)