Taking out a mortgage loan represents a significant responsibility. However, you can make early repayments on the loan to reduce the total amount that needs to be paid over the loan's lifespan. When you make an upfront payment, it directly reduces the loan balance without factoring in additional interest or fees.
Why Repay a Mortgage Loan Early?
One of the most common reasons to repay a mortgage loan early is that it can reduce the overall cost of the loan. Every unit of currency you pay in advance is a unit that won't accrue any additional interest, thus keeping the overall loan term shorter and saving you money.
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Early repayments are especially valuable if you have substantial savings. This is because the mortgage interest rate is often higher than the rates you can obtain for savings accounts, meaning the amount you earn from savings is less than what you pay for the loan.
How to Make Early Mortgage Loan Repayments?
There are several ways to make these payments. Lenders will allow you to repay early whenever you have excess cash on hand.
An alternative could be to change the frequency of your payment installments from monthly to every two weeks, resulting in an early repayment. While the difference may not be significant, every additional amount paid helps reduce the total cost of the mortgage loan.
What You Need to Know About Early Repayment?
You can only repay a loan through a written request to the bank. The bank will then process your request, giving you the right to repay any amount, with two options: reducing the loan term or the monthly installment.
Financial institutions are not allowed to impose conditions on repayment, such as allowing only the reduction of the monthly installment, not the loan term, or requiring a minimum repayment amount. This provision is regulated by Law No. 52/2016.
Reducing the Loan Term or Monthly Installment?
Since interest is applied over a longer period, it is recommended to opt for early repayment with a reduction in the loan term. This technique is much more efficient if applied from the first month of the loan. It is advisable to pay the upfront amount on the due date, along with the monthly installment.
When to Make Early Repayments?
You can make upfront payments on the loan when you have extra income, such as receiving a salary increase or when interest rates are rising. It's important to note that early repayment is only possible if there are no outstanding arrears at maturity, both on the mortgage loan and other ongoing obligations.
For more information about early repayment, you can confidently seek the expertise of a credit broker from Imobiliare.ro Finance.
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