After a long period with negative Euribor rates, 2022 is marked with The rise of Euribor and inflation. With the increase in Euribor rates across all maturities and inflation already exceeding 9% in Portugal, many Portuguese are planning to work for a financial break. After all, the cost of living is rising and so are the credit benefits.
If this is your case and you have savings in addition to your emergency fund, consider whether it’s not worth paying off your home loan in the face of higher interest rates. But before making that decision, learn about the advantages and points to consider in amortizing credit.
Amortizing Mortgages With High Interest Rates: Yes or No?
Before deciding whether to pay off your home loan or not, it is essential that you analyze your personal finances. After all, paying off the loan should not put your family budget at risk, nor should it be done through your emergency fund.
If these two points are secured, paying off your home loan can be a beneficial option. And why? Because if your money is stuck in the bank or in a term deposit, know that your money is just losing value.
After all, even if you invest your savings in a term deposit, the interest associated with these deposits does not keep pace with the rise in Euribor prices, let alone the inflation value in Portugal.
Of course, having a savings account is a great sign and you should keep saving for the rest of your life. But if your purchasing power is declining and your family budget feels increasingly tight, using your savings to avoid a difficult financial situation may be the best solution.
Thus, if you pay off your home loan, you have the possibility of getting a new financial break, considering that it will reduce the amount you pay in interest and the value of the monthly mortgage loan.
Be aware of early refund fees
Before proceeding to amortize your home loan, make an account to pay the early repayment commission. yes. Most banks charge a fee for early repayment of a loan, even when it is a partial or full repayment of the loan.
But, according to the legislation, banks cannot charge fees higher than:
- 0.5% of paid-up capital: Loans linked to a variable interest rate.
- 2% of paid-up capital: in housing credit agreements linked to a fixed interest rate.
To find out what repayment fees will be applied by your bank, look at your home loan agreement, as it should be described.
What is the impact on my wallet when I pay off my home loan?
To get an idea of the impact on your wallet when you pay off a home loan, you can use Simulation of credit provision after early amortization. However, know that when you decide to pay off your home loan, the impact on your wallet happens in two ways:
- In the amount of your premium: represents an immediate reduction in the value of the monthly fee;
- Lower interest at the end of the contract: This means that you will save in the long run and the final amount payable on your loan will be lower.
But to get an idea of the effect of credit amortization, let’s use the example of a mortgage with a debt capital of 120 thousand euros, considering that 360 installments still have to be paid. Imagine you have this credit tied to the rate of Euribor for six months, and after the last review, it has a TAN (Euribor spread + for six months) of 1.7%.
If you want to repay your home loan in the amount of 20 thousand euros, your monthly installment is from 425.76 euros to 354.80 euros. This means that you will have an immediate saving of €70.96 on your premium.
If you pay off your balance in a smaller amount, such as 10,000 euros, your premium of 425.76 euros will rise to 390.28 euros (monthly savings of 35.48 euros).
Of course, we can’t ignore higher interest rates and the possibility of your credit provision continuing to rise. Thus, if your TAN reaches 2.5%, you will see that your credit premium goes up from €425.76 to €474.15.
If at this time you amortize your loan by €20,000, you will be able to reduce the premium to 395.12 (saving €79.03). If you choose to repay your loan in the amount of 10,000 euros, the monthly installment will be 434.63 euros, which represents a monthly savings of 39.52 euros.
Do not forget that these savings relate only to the monthly effect of amortization. It is necessary to calculate the effect annually and over the term of the contract.
Additionally, this may be a good time to renegotiate the terms of your home loan agreement or transfer your balance to another entity. After all, with these changes, your financial stagnation may be greater, as there is a possibility of a reduction Spread your home loan Or the amount you pay for related products, such as life insurance, housing credit, and multi-risk insurance.
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