Financial Dictionary - Early repayment
Early mortgage repayment, also known as full amortisation of the mortgage, is the process that consists of repaying our outstanding debt with the bank before the end of the term contemplated in the deeds. On the contrary, if you are only repaying part of the money, it will be a partial repayment.
Repaying a mortgage loan early has some advantages, such as saving interest. According to the French repayment system (which is the one that governs mortgages in our country), interest is paid in the first years of the loan, so we can reduce the final cost of the mortgage. In any case, you should analyse the market before paying off the mortgage, since, if interest is low, it could be more beneficial to invest the amount intended to cancel the debt in financial products.
But it can also have some inconveniences, such as paying an early repayment fee for your mortgage. Financial institutions charge this fee because paying the debt early means that they will lose out on interest that they would have received otherwise.
In any case, this fee is regulated by the Mortgage Law, limiting it to 0.15% in the first five years, or 0.25% in the first three in the case of variable rate mortgages; and a maximum of 2% in the first ten years and 1.5% from the eleventh, in the case of fixed mortgages. It must be taken into account that, in the event of early repayment, the bank can only apply this fee if it has been included in the mortgage deed. It should also show the cost and limits.
In any case, if you decide to repay your mortgage early, you will have to notify the bank sufficiently in advance and you should check this aspect in the mortgage deed. Once this is done, the bank must inform you about the outstanding amount, and about the implications of making said early repayment. You will have to provide written notification of how much you are going to repay and when you will do so. Lastly, you can make the repayment and pay any possible fees and your debt will be paid off.
Early repayment and tax relief
You can still get tax relief from your mortgage if you make an early repayment provided that the loan was taken out before 2013 and the deduction for investing in a primary residence was applied before that year. If these conditions are met, you can deduct up to 15% of the amount paid during the year, including total or partial repayments up to a maximum of 9,040 euros.