Over how many years should the mortgage be repaid: 15, 20 or 30?
Home mortgage loan and repayment.
Repaying a mortgage consists of paying our debt in advance to the bank. Thus, we talk of full repayment, if we return the entire outstanding loan; or partial, if we advance part of the money. Ultimately, this method is the best way to reduce the total cost of the loan on our home.
How does it work? To begin with, we have to know that the mortgage payments are divided into principal and interest. And that, according to the French system, which is the one that governs our mortgages, in the first years we repay the interest portion, and in the last years we pay the principal. So if the mortgage is extended, we will pay more interest and increase the final cost of the mortgage. On the contrary, by repaying it, we will reduce it, also reducing the final cost. In addition, the savings are not the same if we repay the instalment (in that case we will pay a smaller monthly payment), or term (in which case, we will pay in less time).
From all this we make it clear that we must know well how our mortgage works to obtain one or other of the repayment benefits.
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Early repayment fee on mortgage
Although it seems curious, repayment has a cost. Why? Simply, because the entity had planned to obtain profit based on a term and an instalment and the early repayment of the loan means that it would stop receiving agreed interest. This fee is paid at the same time as the principal repayment, so we must have a leftover amount to avoid management and processing costs. And, if that were not enough, the total penalty is usually quite high since, given the competition between entities, the intention is that we do not change banks.
This cost is expressed as an early repayment fee, and it depends on whether the interest on our mortgage is fixed or variable. The Mortgage Law establishes that, for variable mortgages, the maximum fee is 0.25% in the first three years of the loan, and 0.15% from the fourth year. And for fixed mortgages, it is a maximum 2% in the first ten years and 1.5% thereafter.
Therefore, a 30-year, 20-year or 15-year mortgage? Well, we will have to analyse what interests us most, based on our current liquidity, our ability to save and our future interests. In general, repayment in the first years is more expensive whatever the type of mortgage, although the key is to carefully review the conditions of our loan contract. However, on the other hand, repayment at the beginning is usually the most profitable, since we will save interest. And even more so if our mortgage is variable since, if it goes down, by repaying it we can pay off the debt earlier and avoid being affected by possible future increases. Even so,do numbers with a mortgage simulator to ascertain your specific situation.
How to pay off a mortgage?
Firstly, it is recommendable to prepare a repayment table, which is still a mortgage calculator, which will allow us to find out our savings at all times. And then we will have to communicate it to the bank. As easy as that.
Regarding the doubt as to whether to repay the instalment or the term, with the first method, we will lower our monthly payments, although the term remains the same; and with the second we will pay the same, but in less time. In general, it is usually more profitable to reduce the term to eliminate interest, although once again, it will depend on each case (for example, if paying the instalments involves a lot of effort, or if not, if we want to save).
Pay off your mortgage or keep saving?
Firstly, and although it is obvious, if we consider paying off our mortgage, it will be necessary to have sufficient savings. But why not keep saving, instead of repaying? Well, although it depends on each profile, we will have to perform calculations to see which option will be more profitable for us. In general, the lower the home loan, the less interesting it will be to repay, being more profitable to invest in other financial products that provide us with greater returns. That is why we will have to compare the interest on our mortgage with that percentage of profitability.
Is paying off a mortgage tax deductible?
In principle, only loans arranged before 2013 can be deducted, although always depending on the amount that we repay. Mortgages prior to that year allow us to deduct 15% of the contributions, up to a maximum of €9,040. So, if our monthly payments already reach that amount, we will not be able to deduct anything. And otherwise, it would be good to repay the amount which, added to the monthly payments, would give us those €9,040.