Early repayment of a mortgage

We took out a 30-year mortgage. Seven years pass, and we receive an inheritance or win a considerable sum on a TV quiz show. What now? Is it worth repaying the loan in a single payment? Or is it better to gradually increase the monthly payments? Does early repayment of a mortgage entail any consequences?

• Full repayment of the loan ahead of time
• Partial overpayment of the loan
• The Act on Mortgage Credit…
• Real savings

Full repayment of the loan ahead of time

There are many factors that determine whether it is worth repaying a loan in full ahead of time. It depends on:

• The remaining amount to be repaid
• The time left until the end of the loan agreement
• The amount of the early repayment fee
• The detailed provisions of the agreement with the bank

Until 2017, the fee the bank charged for early repayment of a loan was a percentage of the amount, set individually, though usually not exceeding 2.5%. The time at which we decided to repay faster also mattered. If it happened before five years had passed since repayment began, the fee had to be paid as a form of compensation for the bank's lost profits. After that period the additional charge was usually not applied.

Partial overpayment of the loan

Many banks offered their clients the option of a fee-free partial repayment of the loan, usually expressed as a percentage of the full amount. Depending on the provisions of the agreement, this could be 10, 15 or even 30% of the obligation. It is a good solution for those who have a larger amount of money and, instead of spending it, prefer to put it towards repaying their obligations faster. In this way we can shorten the term of the agreement by as much as several years!

It is not without reason that we used the word "usually" several times – in all the cases mentioned, the individual provisions of clients' agreements with banks always took precedence, and these agreements were concluded in different situations and on different terms. This, however, has recently changed.

The Act on Mortgage Credit…

…and on the Supervision of Mortgage Credit Intermediaries and Agents – this is the full name of the act, which was promulgated a year ago, on 21 April 2017.

The most important provisions of the act:

• The early repayment fee may be charged only for a period of 3 years from the start of repayment
• The amount of the fee may not exceed 3% of the value of the amount repaid
• Within the limits introduced by the act, the period and amount of the fee may be adjusted in the agreement between the bank and the client

READ ALSO: TERMINATION OF A MORTGAGE BY THE BANK

Real savings

It should be taken into account that by repaying a mortgage ahead of time we avoid part of the payments. We repay the whole principal and the interest accrued as at the repayment date. Consequently, a decision to settle the debt five years before the end of the agreement will free us from quite a considerable sum.

Example:

• Loan amount: 220,000 PLN
• Repayment period: 20 years (20×12=240 months)
• Interest rate: 3.2%
• Amount of interest: about 78,000 PLN

By deciding to repay the loan after 15 years we will save about 6 thousand PLN in interest with decreasing instalments. It pays all the more to settle the debt earlier – we start, after all, from higher amounts. The same loan repaid after 5 years will let us save as much as 46 thousand PLN!

Let us remember, though, to prepare properly for early repayment of a loan too – for example by first building up an appropriate financial cushion.