Mortgage amortisation procedure explained: The amortization of a mortgage is the procedure by which the capital borrowed by the bank for the purchase of housing is paid by means of the planned monthly instalments.

Early repayment is understood as the advance of part or all the debt payment before the expiration of the contract.

Early repayment can be partial or total, depending on whether the entire principal due is paid or only a part of it.

In case the repayment is partial, the mortgage will continue in force but there will be a reduction in the amount of the instalments or in the duration terms.

Mortgage amortisation procedure

Early repayment can be made at any time of the mortgage loan. In general, it is usually carried out when there is a saved capital that will not be needed in the short term or an extra income that was not counted on.

It is also common in other circumstances, such as the sale of the mortgaged home itself, the proceeds of which go to the repayment of the remaining debt.

However, it should be borne in mind that mortgages in Spain follow the French amortization system.

This means that during the first years of the mortgage, a higher percentage of interest is paid, while as the end of the loan approaches, interest is reduced and the proportion of capital increases.

This means that, a priori, the best time to amortize a mortgage is at the beginning: overall, it will result in a lower interest payment.

Mortgage amortisation procedure circumstances

The decision will depend on personal circumstances, mortgage conditions and interest rates. In addition, it is necessary to consider other factors that come into play.

One of the most prominent is the Euribor, since most mortgages in Spain are referenced to this indicator, which added to the differential, determines much of the interest.

In principle, if the Euribor is high it will be more feasible to reduce the interest payable on the loan.

The tax aspect is also relevant. In Spain, only those mortgages signed before January 1, 2013, can be deducted, and if it is the usual home.

That said, the limit that can be deducted each year is set at 15% of the maximum amortized, up to a limit of 9,040 euros. Thus, the maximum annual amount to be deducted would rise to 1,356 euros.

Mortgage amortisation procedure summary

In summary, there are two ways to amortize a mortgage. First, full repayment implies returning all the money that was outstanding.

On the other hand, if you opt for a partial amortization, there is the possibility of choosing between two alternatives:

-Reduce the instalment: in this case, the number of payments will be lower every month, but the completion of the loan payment does not vary it will end up being paid in the same term that had been previously fixed.
-Reduce the term: this assumption implies that the monthly fee remains the same, but the time is shortened. That is, the debt will be paid off sooner, and there would be a reduction in the total interest burden on the loan.

Imagine that you have a mortgage of 180,000 euros with a fixed-rate interest of 2% and an original term of 40 years.

What would happen if, after exactly half of this period, you wanted to return 40,000 euros in advance? In addition, having bought the house before 2013, you would be entitled to deduct a maximum of 1,356 euros each year. Let us see what would happen in each case:

-With a reduction in the fee: monthly payments would fall from 545.08 euros per month to 342.73 euros, while the savings in interest after the end of the term would be 8,564.80 euros. The total to be deducted would be 27,120 euros.
- With a reduction in the term: the monthly fee would continue to be 545.08 euros, but the pending repayment period would decrease to 11 years and seven months. In this case, the savings would rise to 14,841.24 euros in interest. The total to be deducted would be 15,707 euros.

In this case, the possibility of applying the deduction for the acquisition of a habitual residence makes it more convenient to reduce the fee instead of the term. However, if you had acquired the home from 2013 and, therefore, you were not entitled to this relief, the most attractive option for you would be to amortize term.

Mortgage amortisation procedure decision

When making the decision, it is essential to incorporate into the calculations the fact that amortizing the mortgage sometimes entails the payment of a commission for early repayment. Some entities establish conditions in this regard, to limit the monetary loss, they would suffer due to the cancellation of the loan.

In any case, the legislation establishes maximum commissions that the client can pay in an early repayment:

-Fixed-rate mortgages: the maximum commission is limited to 2% of the outstanding money if it is made in the first ten years of the loan, and 1.5% from the eleventh year to the end.
-Variable rate mortgages: the commission can amount to a maximum of 0.25% of the capital that is amortized in advance during the first three years of the mortgage or 0.15% in the first five. After this period, no refund commission is applied.

These conditions reflect the maximum commissions, although banks may offer other lower ones, and apply only to those mortgages signed after the entry into force of the mortgage law of June 2019.

Partial or full repayment of the mortgage provides an indisputable advantage - the peace of mind of getting rid of a debt or, at a minimum, reducing its volume. Despite this, it does not have to be the most interesting option for you. Each case is different and, therefore, the key is that you know in detail the conditions of your mortgage and put all the aspects discussed above on the balance.

This decision is also influenced by short-term factors such as interest rates and the Euribor. Not only their current situation, but also their prospects for evolution. Also, we must not forget the effects of inflation and we must monitor the fact that many banks set fees for early repayments.

In short, the most advisable thing is to take accounts to calculate the savings that would be obtained with each alternative, to choose the most favourable method based on your circumstances and priorities.

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