Early repayment of the mortgage
We think about the early repayment of a mortgage when we have acquired a significant amount of cash. Sometimes it is also necessary when we want to sell or exchange an apartment bought for a loan
Early mortgage repayment – legal aspects
At present, when granting a variable rate mortgage, the bank may charge us a commission for early repayment within a maximum of 3 years from the date of commencement of repayment. Moreover, the said fee may not exceed 3% of the amount paid back.
According to current regulations:
- The customer has the right to repay all or part of the mortgage in the bank at any time of his choice. It is his duty to “only” submit an application to the bank with a request to provide all the information necessary to carry out this operation.
- The bank has the right to charge a commission for early repayment of the mortgage only for 3 years from the date of signing the loan agreement.
- In a situation where the borrower repays his liability earlier, the bank is obliged to reduce the cost of the loan by the interest that would be accrued over the period by which the lending time was shortened.
How much does early repayment cost?
The loan agreement determines how much early repayment the mortgage costs. The amount of commission that the bank will collect from us can be found either in the aforementioned loan agreement or in the table of fees and commissions. If we take into account that we repay the loan from the beginning, we can negotiate the conditions associated with it before signing the contract.
The period in which we would pay for early repayment is usually between 3 and 5 years. During this time, the bank has the right to demand from us a commission in the amount of 1 to 5% of the amount that is subject to early repayment.
Is early repayment a good solution?
Early repayment of the mortgage is a solution that brings many benefits. The most important of these is reducing the cost of credit. Let’s assume that we took out a mortgage for 30 years. If we repay it after 20 years, we will avoid interest for the remaining loan period, i.e. 10 years. In addition to the resulting savings, earlier we will “get rid of” the debt (which will improve our creditworthiness) and if necessary we will be able to apply for another commitment.
What’s more, we can “use” the current interest rates and repay (or overpay) the loan as soon as possible. Thanks to this, any increase in the monthly installment will not be so severe to us.
Advantages of early repayment
The advantage of early repayment is the option to opt out of those financial instruments that we received “bundled” with a mortgage. Taking a loan in a given bank is associated with the need to set up a personal account there which will affect our salary. If we repay the liability earlier, we have the right to close such an account without any consequences. The same applies to the resignation of a credit card (if it was also attached to the loan).
Earlier repayment of the mortgage also translates into release of the collateral by removing the bank from the mortgage. If necessary, our property can be an attractive type of lien.
Disadvantages of early repayment
The biggest downside, which is burdened with the early repayment of the mortgage, is the need to dispose of more cash once (which, for example, we could invest).In addition, we will repay our loan earlier, but we will not accumulate savings and we will not be able to create a financial cushion .
Having financial security so that we could survive, e.g. when we lose our job, is an extremely important issue. The already mentioned financial cushion will allow us to maintain material stability even when we will not earn income for some time.If you are thinking about paying off your mortgage early, do not do it in the first years of the contract.
The funds allocated for this are better to deposit on the deposit or transfer them to an interest-bearing savings account, and make an earlier repayment only when there are no financial penalties associated with it. Early payment will not pay off for those who have taken out a loan in a foreign currency.
How to reduce lending time?
If we are interested in early mortgage payment we have two options to choose from. The first is overpayment of the commitment. Overpayment of the mortgage involves repayment of a higher amount than the one that we have to pay as part of the monthly installment.We can opt for it, for example, when we want to shorten the loan period. An overpayment can also be used to reduce the monthly installment without changing the duration of the commitment.
The second way to shorten the loan period is to pay the debt in full before the date specified in the contract. However, let us consider the fact that it may be subject to the need to pay a commission. From the point of view of banks’ policy, such a move is fully understandable, because they earn precisely by granting us loans. The early repayment commission is in this context a compensation for lost future profits.
Early mortgage repayment. Summary
If, after taking out a mortgage, we decide to pay it back earlier, first check on what conditions it is possible. We should remember that, especially at the beginning of the loan agreement, banks may charge us an additional commission for this.