Financial Dictionary - Partial early repayment
Partial early repayment
Partial early repayment
The partial early repayment of the mortgage occurs when you repay the bank part of the principal that it lent you early; this will remove part of the weight without fully repaying the loan.
You can cancel and fully repay your mortgage at any time if, for example, we have saved money and want to give the loan a boost. In addition, by partially repaying your mortgage you can reduce your monthly payment, or shorten the term.
Although you will always pay the same instalment, the ratio between interest and principle will vary in each one. Bare in mind that, according to the French system that governs the mortgages of the Spanish system, in the first years of the loan you will be paying the interest, and later the principle. If you reduce the instalments, you will be able to save more, but this will not reduce interest and you will not save as much in the long term. On the other hand, by shortening the term, you will pay the same amount, but you will pay off the part corresponding to interest in less time, which will mean real savings.
Early repayment fee
The partial mortgage repayment carries an associated fee caused by the penalty that the bank makes you pay since, because be repaying the loan early, it will suffer a financial loss.
Although this fee will depend on what you repay, the interest and the market has maximums established by the Mortgage Law (both in variable and fixed rates) for loans signed after June 2019, which is when said law came into force. In any case, this regulation 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.
In any case, you can try to negotiate this fee with your financial institution.
Is it worth repaying the mortgage early?
Well, as we always say, it depends: several factors must be considered before doing so, such as the interest rate, or the early repayment fee. In general terms, if you make an early repayment you will have less money to return to the bank and you will be able to save on some fees, so you will save a lot in interest. If you repay the mortgage in the first monthly payments, you will have a lower tax burden and you will also be eligible for tax relief if the mortgage is signed before 2013.
However, you will first have to pay a partial early repayment fee. If you have a fixed interest mortgage, you will have to pay another fee to offset the interest rate risk. However, you need to check whether it is worth repaying tax-wise, because if your mortgage is from before 2013, you will be entitled to tax relief and will make a saving.
In short, the easiest way to see if the partial early compensation is worthwhile is comparing the interest rate of your mortgage with the return that you could get by investing in something else, and deduct the fees that the financial institution will charge. In general, if your risk profile is low, early repayment will be a good option.