After the rise in interest rates to 4.25% and the Euribor at its highest for years, the number of mortgages has decreased in annual rates in Spain, and their average amount too, according to recent data from the INE. But this situation has had another consequence: more and more people are opting for early mortgage repayment to avoid what these increases imply in the monthly instalment of their mortgage loans.
Some analyses ensure that the early repayment of the mortgage has increased by figures close to 50% compared to 2022. However, what savings can it bring?
What it is and how to make an early redemption
When a mortgage loan is signed, a repayment term and monthly instalments are established, including interest, which can be fixed or variable. Repaying the mortgage means an extraordinary amount is delivered to the financial institution to reduce the outstanding debt. From there, the bank offers two possibilities:
• Reduce the repayment term: maintain the same instalments to repay the bank in less time.
• Reduce the monthly instalments: the repayment term is maintained, but the instalments are lower.
When is it more interesting to pay off a mortgage?
Generally, the ideal is to repay as soon as possible because of the schedule loans have in Spain. In the first instalments, we're mostly paying interest, and their amount gets reduced with time.
Early repayment has a double benefit. On the one hand, pay less interest. On the other, in times of crisis and the case of variable mortgages, avoid the effect of potential increases in the Euribor (and the mortgage payment, consequently). There are also drawbacks: commissions banks charge for an early redemption are higher in the first years.
On the other hand, if it has not been possible to repay before, doing it when the Euribor is high is a good decision. In this way, we'll reduce interest significantly.
What's better: lower the number of terms or the amount of the instalments?
It depends on very different circumstances and the goals set when deciding on the early repayment of a mortgage:
• Reducing the instalments implies greater comfort when facing the mortgage payment, increases the family's purchasing power in their daily economy, and the chance of saving. In addition, those who purchased a home before 2013 can continue to benefit from tax breaks.
• Reducing the terms allows one of the main economic burdens for families to be released sooner. It is a valid option when you have a significant amount of money out of savings or an unexpected situation, such as an inheritance or a lottery prize.
In any of the cases, we recommend evaluating every option with calm. The advantages and savings of early mortgage repayment can vary significantly depending on the characteristics of the loan, personal circumstances and the alternative chosen in each case.
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