Reducing the mortgage: strategies and recommendations
Reducing the mortgage is an action that consists of repaying it with the aim of making a total or partial cancellation of the mortgage loan granted by the bank before its maturity or at the time it ends. From JLA Notarios, our notary office in Barcelona, we explain everything you need to know.
Types of mortgage amortisation
The first thing is to understand the different types of mortgage repayment that we can opt for. We can find three different varieties depending on the payment made:
- Total repayment at the end of the term: In this case, all the agreed instalments are paid within the deadlines specified when formalising the contract at the notary’s office in Barcelona.
- Partial early repayment: A payment of part of the capital is made in advance. This type of operation is usually subject to fees, although these are becoming less common.
- Total early repayment: The contract is settled by paying off the remaining loan balance. This action involves paying compensation for loss of interest, which is stipulated in the contract signed before Notaries in Barcelona.
If you want to learn more about the steps to follow after cancelling the mortgage, we recommend this article:
The keys to making an early repayment of the mortgage
When deciding to take this step, it is important to consider a series of guidelines that allow you to assess the suitability of early mortgage repayment:
- Fees: Carrying out this action outside the stipulated deadlines may entail a series of penalty fees, the maximums of which are set by law. It is important to perform the associated calculations to check the profitability of the operation.
- Euribor: In the case of variable mortgages, this indicator is key. The higher it is, the more worthwhile it is to make a partial mortgage repayment and even a full one.
We recommend reading the following article to complete the information on variable interest or fixed interest mortgages:
When and how to amortise to reduce the mortgage?
With all this data on the table, the time comes to decide when we should carry out the reduction of the mortgage and its repayment. The monthly payment consists of two elements: the interest and the repayment of the principal. When paying mortgages, a repayment system known as the French system is followed, which means that although the monthly payments are equal, the first payments have a much higher percentage allocated to paying interest than the last payments. This means that it is more profitable to reduce the mortgage in the early years compared to the later ones.
When making a partial repayment, the law allows the mortgage holder to choose between two options:
- Reduction of terms: The amount of the payment is maintained, but the terms are reduced. This means the last payments of the mortgage are paid, so the mortgage will be fully paid off sooner.
- Reduction of payment: The terms are maintained, but the amount of each payment is reduced. The mortgage will not be paid off sooner, but by reducing the monthly mortgage payments, a person can have more breathing room in their monthly expenses.
From a financial point of view, it is important to know that you will have more financial savings if, when repaying your mortgage, you reduce the term and finish paying your mortgage sooner. This is because by repaying and reducing the term of your mortgage, you are paying the last payments of your mortgage, which have a higher percentage of principal and less interest. Therefore, all the principal you repay by reducing the term of your mortgage will stop generating new interest, which will mean a better financial situation for you and greater interest savings.
When faced with available money that can be used to cancel the mortgage, a common doubt arises: repay or save? If the mortgage interest rate is higher than the return on the banking product, the best decision is to pay off the mortgage. Otherwise, you should carry out an opportunity cost analysis, that is, what you will stop earning if you repay.
Reducing the mortgage is an operation that is carried out with the payment of the instalments, but it can be anticipated totally or partially. When undertaking this operation, it is important to be well informed and analyse the associated costs to check its profitability.
At JLA Notarios, we are Notaries in Barcelona. If you need to know more about a possible mortgage cancellation or want more information to process a mortgage in Barcelona, do not hesitate to consult us. You can contact us via our email bcn@jlanotarios.com, by entering the contact form on our website or by calling 93 159 17 62.
