1. Pay off your loan ahead of schedule
Every borrower has the opportunity to repay any loan early, including a mortgage. The main thing is not to forget to notify the bank in advance about this intention.
If you pay off only part of the debt with an early payment and don’t close the entire loan, the bank will need to send you a new payment schedule.
There are three payment strategies. After making payments ahead of schedule, the borrower can request:
· Reduce the total loan repayment period.
In this case, the monthly payment remains the same, but the portion that goes to pay the principal will increase and the interest portion will decrease. It is this payment option that is most cost-effective to minimize the overall overpayment of the loan. The smaller remaining amount of debt accrues less interest and the overpayment is reduced.
· Reduce the payment amount
This option will reduce your monthly debt payment costs. But at the same time, most of the monthly payment will go towards paying interest and only a small part will go towards the principal debt. This method is suitable for those borrowers who need to reduce the burden on their budget in the future. Maybe you’re not sure where you’ll work or you don’t know how stable your income sources will be.
· The third option is combined: with regular prepayments, you can alternate between shortening the loan term and reducing the monthly payment. The amounts that are freed up in the family budget after reducing monthly payments will allow over time to accumulate an amount that can be used for prepayment and then reduce the term of the loan.
For your information
In the first mortgage payments, the borrower mainly pays interest to the bank, and repayment of the principal begins later. Therefore, it makes sense to reduce the principal debt (lending agency) as soon as possible so that the bank charges less interest on the balance and decreases the overpayment. But if the mortgage is already almost paid off, then it doesn’t make economic sense to close it any faster.
2. Calculate what is more profitable: annuity or differentiated payment.
Most banks offer their clients an annuity payment plan: paying the debt over the entire term in equal installments. However, the overpayment in this case is usually higher than in the case of a differentiated regime.
According to a differentiated scheme, the principal debt is divided equally and then the amounts of monthly payments are reduced. This is possible thanks to a uniform reduction of the principal debt, which also implies a reduction in the amount of interest accrued.
Which is more profitable? It all depends on the situation, experts say. If it is possible to deposit significant amounts at the beginning to save on overpayments, then differentiated payments are appropriate. If your budget is limited, it is better to choose an annuity.
In general, a differentiated payment is more cost-effective than an annuity payment. It is true that there are fewer banks that operate according to this scheme. However, the chances of being approved for a mortgage with differentiated payments are high if the borrower already has more than half the cost of the home.
It is more profitable to pay off the mortgage faster than to reduce the monthly payment, experts insist. Therefore, the most optimal strategy is to start repaying the debt ahead of schedule in the first third of the loan period. This way, you will be able to significantly reduce excessive loan payments. Early repayment near the end of the term does not promise any particular benefit.
3. Monitor mortgage rates at other banks
“Even if the mortgage is already issued, continue studying the interest rates and conditions of other banks,” advises Olga Vyalshina, director of the Roskachestvo Financial Expertise Center. “When you find an offer with more favorable conditions or with a lower price, interest rate, first contact your bank to approve “the same optimal conditions.” If your bank refuses to review the conditions, apply for refinancing with another bank. However, it is advisable to apply for refinancing when the rate of other banks is 1.5 to 3% lower.”
