Redeeming the mortgage means advancing the payment of the property's mortgage loan. This payment in advance can be total or partial, and in the latter case, it is possible to reduce the instalment or the deadlines. The best time and way to do it not only depends on liquidity. It is essential to consider some aspects before deciding.
How to pay off the mortgage
Starting with the formulas to pay off the mortgage, it is worth mentioning their differences:
• Reduce monthly payments: the number of payments expected at the time of signing the mortgage is maintained, but we reduce the instalments. That would be the best advantage. Nevertheless, the reduction in interest rate will not be significant.
• Reduce the term: we maintain the instalment, but we pay it earlier. The great advantage, in this case, is not only that the loan gets redeemed in less time but that we pay less interest.
Choosing one or the other procedure will depend on the situation and the financial flexibility available. Besides, we must not forget the following: Those who signed a mortgage before 2013 maintain the tax advantage of the home purchase deduction. Therefore, it will be necessary to think carefully about the best option in their situation.
When is it better to redeem
Regarding the ideal time to repay the mortgage, we'll contemplate the most common mortgage loan given in Spain. It is a model where we pay more interest in the initial instalments. Therefore, the recommendation is to provide capital for the payoff in the first years of the loan.
However, another significant factor must get assessed: the bank amortization commission. With the entry into force of the Mortgage Law, these commissions were notably lowered. Currently, they depend on the type of loan:
• In the case of fixed interest mortgages, they are 2% when the payoff takes place in the first ten years and 1.5% from thereon.
• If it is a variable mortgage, the maximum commission is 0.25% during the first three years and 0.15% in the fourth and fifth years. From then on, no cancellation fee can get charged.
Given that, we should check how many years we have been paying the mortgage. Sometimes it will be worth waiting a bit to save on early termination fees, even when they are low. In any case, calculate if the interest rate for pending payments is lower than the penalty for the early payoff.
In another sense, do not forget the Euribor. The lower the interest, the less you will save redeeming. If we pay a low-interest rate, it may be more convenient to seek a return on the money available. Either in other properties or in financial products that offer good profitability.
Regarding the mortgages signed before 2013 and their tax benefits, we must not forget that the Treasury returns 15% of the amount contributed during the year up to a limit of 9,040 euros. So, if you pay off the mortgage, you can lose this tax benefit.
Therefore, many factors are necessary to assess calmly before paying off the mortgage. But first, you have to find the ideal home and, in that regard, Spainhouses helps you by offering you the best portfolio of properties for sale in Spain. Start looking for your new home now.