After a long period with negative Euribor rates, the year 2022 is being marked by a rise in Euribor and inflation. And with the increase in Euribor rates in all maturities and an inflation that already exceeds 9% in Portugal, many Portuguese intend to act to gain a financial break. After all, the cost of living is rising and so are credit benefits.
If this is your case and you have savings in addition to your emergency fund, consider whether it is not worth paying off your home loan in the face of rising interest rates. But before making this decision, know the advantages and points to consider in a credit amortization.
Amortize home 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, repaying a loan should never put your family budget at risk, nor should it be done with your emergency fund.
If these two points are assured, then paying off your home loan can be an advantageous option. And this why? Because if you have your money stuck in the bank or in a term deposit, know that your money is just losing value.
After all, even if you invest your savings in a term deposit, the interest associated with these deposits is not keeping up with the rise in Euribor rates, much less the value of inflation in Portugal.
Of course, having a savings account is a great sign and you should continue to save throughout your life. But if your purchasing power is decreasing and you feel your family budget is increasingly tight, applying your savings to avoid a complicated financial situation may be the best solution.
Thus, if you pay off your home loan, you have the possibility of gaining a new financial break, taking into account that it will reduce the amount you pay in interest and the value of your monthly mortgage loan installment.
Pay attention to the early repayment fee
Before proceeding with the amortization of your home loan, make an account of the payment of the early repayment commission. Yup. Most banks charge a fee for the early repayment of a loan, even when it is a partial or total repayment of the loan.
But, according to legislation, banks cannot charge a fee greater than:
- 0.5% of the capital repaid: Loans linked to a variable interest rate;
- 2% of the capital repaid: In housing credit contracts linked to a fixed rate.
To find out what the reimbursement fee will be applied by your bank, look at your home loan agreement, as it should be described.
What is the impact on my portfolio when paying off my home loan?
To get an idea of the impact on your portfolio when paying off your home loan, you can use the loan installment simulator after early repayment. However, know that when you decide to pay off your home loan, the impact on your portfolio happens in two ways:
- In the value of your installment: Representing an immediate reduction in the value of your monthly fee;
- Reducing interest at the end of the contract: This means that you will save in the long term and the final amount payable on your loan will be lower.
But to get an idea of the impact of a credit amortization, let’s use the example of a mortgage with a debt capital of 120,000 euros, taking into account that 360 installments remain to be paid. Imagine that you had this credit associated with a six-month Euribor rate, and after the last review it had a TAN (six-month Euribor + spread) of 1.7%.
If you wanted to pay off your home loan with 20,000 euros, your monthly installment would go from 425.76 euros to 354.80 euros. That is, you would have an immediate savings of 70.96 euros on your installment.
If you pay off your credit with a lower amount, such as 10,000 euros, your installment of 425.76 euros would rise to 390.28 euros (monthly savings of 35.48 euros).
Of course, we cannot ignore the rise in interest rates and the possibility that your credit provision will continue to rise. And so, if your TAN reached 2.5%, you would see your credit installment go from 425.76 euros to 474.15 euros.
If, at this time, you paid off your loan with 20,000 euros, you would be able to reduce your installment to 395.12 (savings of 79.03 euros). If you chose to repay your loan with 10,000 euros, the monthly installment would be 434.63 euros, which represents a monthly savings of 39.52 euros.
Do not forget that this savings is only related to the monthly impact of amortization. It is necessary to account for the impact annually and throughout the term of the contract.
In addition, this may be a good time to renegotiate the terms of your home loan agreement or transfer your credit to another entity. After all, with these changes, your financial slack may be even greater, as there is a probability of lowering the spread of your home loan or the amount you pay for associated products, such as life insurance, home loan and multi-risk insurance. .
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