Is it worth paying off my mortgage with rising interest rates? – Money and career

 Is it worth paying off my mortgage with rising interest rates?  - Money and career

After a long period with negative Euribor rates, the year 2022 will be characterized by an increase in the Euribor and inflation. And with the rise in Euribor rates across all maturities and inflation already above 9% in Portugal, many Portuguese are planning to face financial difficulties. After all, the cost of living is rising and so are credit benefits.

If this is the case for you and you have savings in addition to your emergency fund, consider whether it is not worth paying off your home loan in light of rising interest rates. But before you make this decision, you need to know the advantages and points to consider in a credit write-off.

Writing off mortgage loans with rising interest rates: yes or no?

Before deciding whether or not to pay off your home loan, it is essential that you analyze your personal finances. After all, paying back a loan should never jeopardize your family budget, nor should your emergency fund.

If these two points are insured, paying off your home loan can be an advantageous option. And this why? Because if you have your money in the bank or in a term deposit, know that your money simply loses value.

After all, even if you invest your savings in a term deposit, the interest on these deposits won’t keep up with the rise in Euribor rates, let alone the value of inflation in Portugal.

Of course, having a savings account is a good sign and you should keep saving for the rest of your life. But if your purchasing power is dwindling and you feel like your family budget is getting tighter, using your savings to avoid a complicated financial situation may be the best solution.

So if you pay off your home loan, you have the option of getting another financial break, bearing in mind that the amount you pay in interest and the value of your monthly mortgage payment will decrease.

Note the fee for early repayment

Before you proceed to repay your home loan, make an overview of the payment of the early repayment commission. yep. Most banks charge a fee for early repayment of a loan, even if it is a partial or full repayment of the loan.

But according to the law, banks are not allowed to charge a fee higher than:

  • 0.5% of the capital repaid: Loans linked to a variable interest rate;
  • 2% of the capital repaid: In home loan contracts linked to a fixed interest rate.

To find out what your bank’s fee will be, look at your home loan agreement as it should be described.

What is the impact on my portfolio when repaying my home loan?

To get an idea of ​​the impact on your portfolio when paying off your home loan, you can use the loan payment simulator after prepayment. However, know that when you decide to pay off your home loan, the impact on your portfolio will come in two ways:

  • In the value of your installment: an immediate reduction in the value of your monthly fee;
  • Interest reduction at the end of the contract: This means that you save for the long term and the final amount to be paid on your loan is lower.

But to get an idea of ​​the impact of a credit write-off, let’s use the example of a mortgage with a debt of 120,000 euros, taking into account 360 installments to be paid. Suppose you had linked this credit to a six-month Euribor rate, and after the last assessment had a TAN (six-month Euribor + spread) of 1.7%.

If you would like to pay off your home loan with 20,000 euros, your monthly amount would go from 425.76 euros to 354.80 euros. That is, you would immediately save 70.96 euros on your advance.

If you repay your credit with a lower amount, for example 10,000 euros, your installment amount will increase from 425.76 euros to 390.28 euros (monthly savings of 35.48 euros).

Of course, we can’t ignore the rise in interest rates and the possibility that your credit facility will continue to rise. And so, if your TAN reached 2.5%, your credit would go from $425.76 to $474.15.

If you would currently pay off your loan with 20,000 euros, you could reduce your installment amount to 395.12 (savings of 79.03 euros). If you choose to repay your loan with 10,000 euros, the monthly amount would be 434.63 euros, which equates to a monthly saving of 39.52 euros.

Remember that this saving only relates to the monthly impact of depreciation. It is necessary to account for the impact annually and during the term of the contract.

In addition, this may be a good time to renegotiate the terms of your mortgage agreement or to transfer your credit to another entity. After all, with these changes, your financial arrears can be even greater, because there is a chance that you will reduce the spread of your home loan or the amount you pay for associated products, such as life insurance, home loans and multi-risk insurance. .