Financial Dictionary - Partial redemption
Partial repayment of a mortgage is a procedure which returns a portion of the outstanding principal that the bank lent to us, thereby reducing or repaying the debt. There is also complete repayments, where one repays all of the debt and thus repays the mortgage early.
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We can pay off the mortgage if we have, for example, savings and we want to pay back a portion of the loan early, or if we sell the property that we have mortgaged and use the money obtained to pay off the debt.
This pay back would be early, since we would be returning the principal prior to the due date appearing in our contract. We can do it at any time during the loan.
This payment will include the principal part and also the interest of the loan, which will vary depending on the type of fixed rate mortgage, variable rate mortgage or composite mortgage. In addition, by making a partial repayment of our loan, we can make the monthly payment smaller, or make the term shorter (in which case we will pay off our debt earlier and reduce the total interest).
If we reduce the payment amount, we will pay less money each month, and we will be able to save more but we will not reduce the interest, and we will not save much in the long term. In contrast, if we reduce the term, we will pay the same amount, but by repaying the mortgage early, we will pay interest for less time, which will mean real savings.
As we noted previously, the monthly payments of our mortgages include the principal loaned as well as the interest. And since almost all of them are governed by the fixed (or progressive) repayment system, the payment amount remains constant, such that, because we always pay the same amount, the proportion between principal and interest will vary for each payment. Since these are paid mainly during the first years of our mortgage, making partial repayments, especially at the beginning, is highly recommended in order to reduce interest.
Early repayment fee
Partial repayment has a specific fee which varies depending on the portion repaid, the interest and the market, in keeping with the maximums established by the Mortgage Law (for both variable rate mortgages and fixed rate mortgages) for loans signed after June 2019, which is when said law came into force.
Is early repayment worth it?
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. The easiest way to determine whether early repayment is more beneficial is to compare the interest rate of our mortgage with the earnings that we can obtain by investing in something else.