Although, when choosing a mortgage, the possibility and cost of early repayment are rarely key issues, there is no customer who would not ask an adviser. Generally, none of us wants to pay back the loan in retirement. It often turns out that the apartment needs to be changed to a different one or a house or the location should be moved to another city.
Customers often complain about the bank costs of early repayment. However, it should be noted that early repayment is not beneficial for the bank. A low-interest loan is only profitable if it is paid for relatively long. Therefore, by paying your mortgage early, you can pay up to 5% commission. In Poland, costs usually disappear after three or five years, and in other European countries or in the United States customers are not so privileged.
Does overpayment of the loan pay off?
It is a step worth considering both from the point of view of mental comfort and economic dimension.
The advantage of overpaying the loan is:
- relief for our mental condition, the smaller the loan and installment, the more we feel independent and safe, e.g. it’s easier for us to risk and change jobs, enlarge our family, go on trips,
- savings – the more credit we overpay, the less interest we pay over the entire loan period,
- relief for our household budget – a lower loan installment allows us to leave more funds in the household budget or improve credit standing,
- the possibility of paying off the loan shorter – if we overpay the loan and at the same time sign the annex to the loan agreement leaving the installment at the current level, we will pay the entire amount in less time.
However, the real gains of loan overpayment should always be converted using a specific example. Then the profit can be calculated according to the scheme: interest saved – costs of overpayment alone – costs of any annexes = net profit.
However, if someone does not have specific savings, then overpay the loan should forget. Construction of savings first, and then overpayment. Disposing of all funds can lead to a situation in which, in the event of problems, we will be forced to take much more expensive consumer loans or loans.
The downside to overpaying the loan
- mortgage is the cheapest form of debt – at a time when we have low interest rates, the mortgage may look like “money for free”,
- if we are able to earn more than the mortgage interest rate by trading the money we have, then overpaying does not make sense,
- it is always worth having a cash surplus in order to be able to maintain liquidity even when we encounter temporary but severe financial challenges, e.g. costs of surgery and treatment, costs related to unemployment for some time, etc.