Is it beneficial to repay a housing loan early?Is it beneficial to repay a housing loan early?

In the old days, it was sometimes said that debt was someone else’s, but can you say the same about a home loan? Today, with interest rates rising, many homeowners are probably wondering whether they should use their savings to pay off their mortgage early. Let’s discuss what you should consider before taking that step.

In general, mortgages have long been considered cheap, and today’s monthly payments will look much less onerous in a few years, taking into account the terms of the contract and inflation. However, the rise in interest rates this year may make people question this assertion. Of course, the average six-month Euribor interest rate to which most home loans are pegged will not remain high forever, but early repayment is always an option for customers.

Can I use the spare money for something else?

The first thing to think about when you have some spare cash is your savings buffer and the security that comes with it. According to Swedbank’s Financial Health Index, the situation of Estonians is tense. This is mainly due to the low level of savings, the lack of a safety net, and the feeling of insecurity when it comes to retirement. Only 29% of the population has a savings account with at least three months of family income. Therefore, when you have some spare cash, the first thing to think about is whether you can put it away for a rainy day.

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Secondly, before paying off your mortgage early, you should review your other financial commitments. For example, it makes sense to opt for smaller loans or installments with a higher interest rate. However, if you have no other commitments and have already put aside the recommended savings reserve of at least three months, you should consider whether paying off your mortgage early would be more profitable than investing the same amount of money. If investing will bring a higher return, it makes sense to choose it; if not, it is more appropriate to fully or partially pay off the mortgage. At the same time, remember that investing involves the risk of losing the invested funds. It is also worth paying attention to the savings options offered since rising interest rates mean that savings have again become a good way to accumulate.

How does early repayment work?

The most convenient way to repay a mortgage loan is via online banking. This can be done either in full or in part. Since, for example, Swedbank has no minimum repayment limit and repayment via the Internet is easy, this option is becoming increasingly popular. The average repayment amount is 2,500 dollars, and on average 800 partial repayments are made each month, and in some cases several times a month. About 180 clients repay the entire remaining mortgage debt each month via online banking, and this can be done when the client has money in the account. Full repayment of the remaining debt is usually associated with the sale of the property, and two-thirds of the repayments are made after the sale, with the assistance of a bank specialist.

When repaying a loan via Internet banking, a service fee is charged, which is a monthly percentage of the repayment amount. Only a mortgage loan with a regular annuity schedule, a so-called floating rate loan, can be repaid via Internet banking. If repayment is made based on an application to the bank, the fee for early repayment is three monthly percentages of the repayment amount, unless the bank has been notified of this three months in advance. If the bank has been notified of the desired action three months in advance, no fee is charged.

What is the benefit of early repayment?

The benefit of early repayment depends on the repayment amount, the amount owed, and the term of the contract. Let’s take the example of a mortgage loan of €100,000 for 25 years, based on the current average interest rate of 5.5%. In this case, the monthly loan payment is €614.09, and the total interest cost is €84,226.25. The calculation given here and other calculations in this article are approximate.

Let’s assume that the customer can repay a loan of 3,000 dollars. In this case, the monthly loan payment is reduced by 18.43 dollars, i.e. by 595.66 dollars in total. However, the total interest expense is reduced by 2,526.79 dollars, to 81,699.46 dollars. So, although the monthly benefit may seem small, over the long term of the loan it will amount to a significant amount.

For those who have a loan, the repayment amount, repayment fee, and loan repayment schedule after making changes can be calculated in the Internet bank before making changes.

In conclusion 

You should think about early repayment of your mortgage loan, carefully analyze your financial situation and other financial obligations, and then make a decision. It should also be borne in mind that if current interest rates do not remain forever, the low Euribor rates that we have seen in previous years may not exist for some time. Currently, repayment of a loan is as simple as possible for the client: loan calculators allow you to calculate future loan payments taking into account payments and interest, and loan repayment can be made conveniently online.

After repaying the loan, it is worth remembering that there is always the opportunity to apply for a new loan. But in this case, new loans and new conditions will apply.

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