Probably few are lucky enough to buy an apartment or build a house without a mortgage. We all know that it is not a matter of choice at all, because no one in their right mind would rather decide on debt in the bank if it had enough capital to invest in real estate.
Their prices are really high and the level of earnings in Poland is so varied that instead of buying anything, the more on credit, we prefer to rent. This approach is quite understandable, but at the same time it incorrectly assumes no chance to improve our material situation.
We might as well take a mortgage, and then get a really well-paid job and get the option of early repayment. In this case, another problem arises – is it worth it at all? Is overpayment of credit always a profitable solution? Let’s find out.
Does overpayment of the loan pay off?
Mortgages usually have significantly longer repayment periods than, for example, cash loans. Instead of signing a contract for several years, we decide to cooperate with the bank for up to 20-30 years, depending on the loan amount. It is also monthly installments that burden our household budget much more than a classic loan. Therefore, the motivation to pay back such a commitment as soon as possible (or even on time) is really great.
Let’s assume that after 10 years of paying off the mortgage, we suddenly become the owners of a larger sum, thanks to which we can pay the debts for the next 5 years and fulfill the contractual conditions earlier. Is this a profitable move for us? There is no point in formulating such a question in relation to the bank, because the answer is obvious.
From an institution’s point of view, this is not a very favorable move. It means earlier loss of the customer (and it is not certain that in later years he will direct his steps to the same bank) and loss of money from interest. Let’s see what we customers can lose and gain.
The specificity of the mortgage is that, although it applies to high amounts, banks grant it relatively willingly – in addition to the money they receive from interest, they also own real estate, which is protection against late clients or those who have stopped paying further installments at all. On the other hand, financial institutions, due to the high competition on the market, appreciate every acquired borrower. They do not want to lose it quickly, so it is not in their best interest to repay the loan faster. They hedge against this possibility, e.g. by entering into contracts with limited possibilities of free overpayment of the loan in the first years of the commitment. Others again, instead of obliging the client to pay monthly installments together with interest added, they prefer to collect their equivalent first. In practice, it looks like that first, even for several years, we pay interest on the mortgage and only later its proper part (capital).
What we, the clients, should remember about is the dynamically changing situation on the financial market. Interest rates at the time of receiving additional cash may be much higher than when we were signing the contract. Therefore, overpayment of the loan and its early repayment can be a salvation against their next, unpredictable increase. On this occasion, one more important issue should be raised – the famous credit standing. Along with the settlement of the last installment of the mortgage, we fully recover it and we can again apply for other banking products.
For more information on scoring, see CREDIT ABILITY – WHAT DO YOU NEED TO KNOW ABOUT IT?
Mortgage overpayment – available solutions
Mortgage overpayment is, contrary to appearances, not such an obvious matter. We have three modes of action at our disposal: overpayment with leaving the repayment period, overpayment with shortening the repayment period, but leaving the installment amount and overpayment with shortening the repayment period, but with an increase in the installment amount. Each of them can be tested using calculators available on bank websites. Another option is to verify them based on spreadsheets created by financial experts, also to be found on the Internet.
Mortgage overpayment – what will be better for us?
Compliance with the first of the above-mentioned methods – an overpayment while leaving the repayment period – will not significantly affect the final amount of the liability. Therefore, it is best to choose the option number two overpayment with a shortened repayment period or three overpayment with a shortened repayment period and higher installments.
Thus, we reduce not only our debt, but also the time it will weigh on us. However, we should remember that the bank will require us to draw up an annex to the contract (paid PLN 100-500). It is possible that it will also check our credit standing once again. Let’s prepare for additional formalities.