Doubts are more than normal, especially when we take out a mortgage. For example, the management of the loan when the opportunity to make an early repayment appears. At this point, one of the most frequent doubts is to see if it is better to reduce the monthly payment , or the total term of the loan . The answer to this question is not exclusive, since it will depend on the economic circumstances of each person and their medium and long-term objectives.
How does early repayment work?
I think we would all like to have the superpower of anticipating. In this case, early repayment consists of paying off part of the outstanding mortgage amount before the agreed term. Yes, it can be partial or total. In the first case, the holder of the loan can reduce the amount of the monthly payment or shorten the term of the loan. And like everything in life, both options have their pros and cons.
The question everyone is asking: reduce the fee or reduce the term?
If you have decided to use the amortization to reduce the monthly payment, you will enjoy greater liquidity each month, since the monthly payment will be lower. On the plus side: you will have more money for other expenses. Disadvantages? In the long term, you pay more interest since the loan does not change.
If you reduce the term, you will continue to pay the same monthly payment, but the loan will end sooner. On the plus side: you reduce the total amount of interest to be paid, making the final cost of the property lower. And as always, in the short term, you will not have greater liquidity.
Factors to consider when choosing
To make the best decision, you have to take into account several factors:
• The main one is your current financial situation : if you have limited financial capacity and the monthly payment is high, you have to reduce it. However, if you have solid financial stability and can comfortably afford the payments, you may be more interested in reducing the terms, since the interest will be reduced.
• Let's not forget something that plays a very important role: interest rates . If you have opted for a variable rate mortgage and an increase in interest is expected, reducing the term can be a good strategy, as it will protect you from future increases in the instalment. On the other hand, if your mortgage is fixed rate, you can rest easy because your exposure to changes is drastically reduced.
• And since experience counts, the length of your mortgage also matters. In the first few years of the loan, a large part of the payment is used to pay interest, so reducing the term at this time may be more profitable in the long term. On the other hand, if you have already paid most of the interest, reducing the payment may be more beneficial.
Advantages and disadvantages of early amortization
Straight to the point. We want you to quickly understand the most important advantages and disadvantages.
1. The main advantage is the improvement of monthly liquidity, which can be especially useful if you have other important expenses or want to increase your savings capacity. However, at the same time, this option means paying more interest in the long term.
2. Reducing the term of the loan allows you to pay off your mortgage earlier and pay less interest overall. However, you will keep the same monthly payment, so you will not enjoy greater liquidity in the short term.
3. Before making an early repayment, it is essential to review the conditions of the mortgage contract, since some financial institutions may charge fees for this type of operation.
There is no universally best option when paying off your mortgage. The decision between reducing the payment or the term will depend on your financial circumstances, your future needs and the market situation. If you are looking for greater monthly liquidity, reducing the payment will be the best option. If you prefer to save on interest and finish paying off your mortgage sooner, reducing the term may be more convenient.
