with the Euribor Maximum since the end of 2008, in the midst of the bursting of the real estate bubble, there are those who are already thinking about how to deal with the increase in the cost of variable mortgages; For an average loan between 150,000 and 300,000 euros, the premium will increase between 200 and 500 euros. One option to weather the storm is to change to a fixed rate…or seek to save interest with early repayment.
What is early repayment? This consists of paying part or all of the mortgage debt repayment; Don’t just pay in installments, but suddenly take a larger amount to try and reduce what is being paid month by month or the number of years of payment.
In this sense, when you go to the bank to carry out this operation, the entity asks how we want to deduct the money that we are going to repay in advance. When making this extraordinary consumption, two things can be done, as HelpMyCash states: «Reduce profit payout period To pay off the loan sooner. The monthly installment will remain as it was before the amortization was implemented. Or reduce the amount of premiums to pay less each month. The return period will remain unchanged.
Now, there are a number of loans that can benefit you the most from early repayment depending on the time of the mortgage. “The best time to pay off our mortgage would be when we have saved up a large amount of money that we won’t need, or because we have extra income that we haven’t counted on,” Bankinter says on his blog.
In this regard, it must be remembered that in Spain Mortgages follow the French amortization system, so that a higher rate of interest is paid in the early years and at the end of the loan a higher percentage of the principal. The conclusion of this financial entity is that “the sooner we pay off our mortgage, the better, because in the long run we will pay less interest.” Do this at the beginning of the loan rather than the end of it.
Once we have considered that, we should ask ourselves whether we want to amortize by lowering the monthly payment or reducing the years of the mortgage. As BBVA points out in its financial portal, “Reducing the premium amount (remember this includes both principal and interest) makes the monthly payments more comfortable. In turn, by amortizing a portion of the mortgage principal, the overall interest to be paid throughout the course will be reduced. Loan period For its part, “reducing the repayment period guarantees greater profitability, since less interest is paid compared to the previous option (lower installment). And as a drawback, the monthly fee is not reduced. In theory, it is profitable to lose years, not fees.
Tomás Gómez Franco, professor of business and management degrees at VIU – International University of Valencia, recalls that everything depends on a person’s purchasing power. “The important thing is that you go to the branch and the bank tells you How much quota or years lowers you?. There you really calibrate whether or not lowering fees will give you enough disposable income,” he says if you choose this option. In other words, do the math to see if the savings are really attractive.
That’s why we give a working example that HelpMyCash compiles. Mortgage of €150,000 at 2% and for 30 years; In the year 15 early installments of 25,000 euros. This is how the calculations appear:
With reduced fees
It remains to pay 15 years of the loan with a monthly installment of 554.43 euros. We make the early payment and decide to apply it as a reduction in the fees paid each month.
In this case, there is still 15 years of the amortization period, but the fee is reduced to 401.49 euros per month. Savings in interest 4210.58 euros.
with reduced range
We start from the same scenario: there are 15 years left to pay with a monthly installment of 554.43 euros. We choose to pay off our loans early and apply them as a reduction in the repayment term.
The number of years we will have to pay has been reduced to 11 and the amount of interest we provide has been increased to €7727.75.
Thus, everything will also depend on the income available to each mortgagee. If you are working on monthly fee It is about reducing the financial effort that needs to be done every month, and on the other hand, touching the years, still pay the same amount in less time, which is necessary to be able to maintain financial strength.
Moreover, it should be borne in mind that almost all banks charge a commission for early repayment. As Evo Banco points out, commissions are regulated by law and there is a current cap. “On fixed rate mortgages, they can charge us up to a maximum of 2% of the amortized principal, if the process is carried out in the first 10 years. The maximum limit specified for this commission is reduced to 1.5% when we amortize after that period. If we talk about a variable mortgage, 0.15% will be applied during the first five years of the mortgage and 0.25% in the next three years,” said their help portal.