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HomeFINANCEIs it the right time to pay off the home loan?

Is it the right time to pay off the home loan?

With the provision of mortgage loans increasing due to the rise in Euribor, many Portuguese are questioning whether it is the right time to repay the housing loan. In fact, given the rise in interest rates and inflation, this is an excellent time to rethink your personal finances, such as managing your family budget, reviewing your home loan and even your insurance portfolio.

After all, when there is an increase in expenses, measures must be taken to prevent the family budget from being at risk. And if you have a savings account in the bank, consider whether you prefer that your money keep asideeven if it devalues ​​your savings, or if you want to apply it in order to gain a new financial slack.

To help you make this decision, below, we show you the impact of the Euribor increase on your credit provision, and how much you can save if repay your home loan.

Also read: Rise of Euribor: Money in the bank or amortizing home loans?

The rise of Euribor and impact on the lives of the Portuguese

Since the end of 2021, it was expected that Euribor rates would start to rise, and 2022 confirmed this scenario. With Russia’s invasion of Ukraine at the end of February, and extremely high inflation in the Eurozone, expectations grew that the European Central Bank, ECB, would raise interest rates in the first quarter of 2022. As a result of this context, the Euribor rates rose progressively in all maturities.

To control inflation in the Eurozone, in July of this year, the European Central Bank decided to act, increasing key interest rates by 0.5%. And in this way, the cycle of negative interest rates in the Europe Zone comes to an end, at a time when Portugal registers an inflation rate of 9.1% (July values).

Faced with this scenario, many Portuguese are beginning to see their mortgage payments increase, as well as the cost of living. And as such, this is a time when it is necessary to rethink the management of the family budget and reflect on savings solutions.

Also read: Euribor Simulator: The impact of rising interest rates on home loans

Will the rise in Euribor affect my home payment a lot?

Everything will depend on the evolution of Euribor rates in the near future and on the decisions of the European Central Bank (ECB). However, the rise in Euribor is already beginning to be felt in mortgage loan installments.

The evolution of Euribor rates follows the expectations surrounding the decisions of the ECB. Thus, despite the fact that the central bank has only raised interest rates by 50 points once, the increase in Euribor rates is greater than this increase, as can be seen in the table below that analyzes the evolution of rates between April and July.

In practice, the impact of this evolution implies that those who took out a loan in April have a lower installment than those who did it in July. To get an idea of ​​the size of this difference in a family’s budget, let’s look at an example:

A loan of 100 thousand euros, with a term of 25 years, and a spread of 1.3%, whose installment was paid in June (based on the monthly average of the April Euribor) corresponded to a monthly charge of 376.37 euros . If this same credit was contracted in the meantime and has as a reference the monthly average of July, the installment rises to 412.60 euros, it’s another 36.23 euros.

In order to better understand the impact of the rise in Euribor on the provision of mortgage loans, the simulator of the Euribor variation in home loans help us do these maths. If in the case described above, the Euribor rose to 2%, it would correspond to an installment of 489.96 euros, that is, 86.36 euros more than in July.

Let’s take another example: imagine that you have a home loan with an outstanding principal in the amount of 120,000 euros and that you still have 30 years to pay off your loan, the associated spread is 1.2% and the contract is indexed to the 12-month Euribor. If the last review took place in the summer of last year (first installment paid in August), it means that you have paid 370.51 euros. This, at a time when the 12-month Euribor that is considered for this case (June) was at -0.484%.

However, in this month’s revision (12 months later), the Euribor of 0.852% (June 2022). Which means that your new installment will be 446.67 euros. That is, within 12 months, its installment increased by 76.16 euros. But if Euribor continues to rise and reach 2.5%in its 2023 review, its monthly installment would change to 552.34 euros. Which represents an increase in 105.67 euros within one year.

What if I have a 6 month Euribor rate?

If your home loan is associated with a 6-month Euribor rate, know that although the values ​​are lower compared to the 12-month Euribor rate, the scenario is not that different. Furthermore, within 12 months, your installment will undergo two updates.

But to get an idea of ​​the values ​​in question, let’s use the same example of a mortgage with the capital in debt of 120,000 euros, with 360 installments still outstanding. At its last credit review, in February 2022, it had a Euribor rate of -0.545% (value for December 2021), then it would have a monthly installment of 367.25 euros.

However, in August of this year, its performance will be reviewed again. Therefore, a Euribor rate of 0.162% (taking into account the value of June 2022), which implies the monthly payment of 406.24 provision euros. Ie, would suffer an increase of 38.99 euros.

if the Euribor at 6 months reach 2%, its credit provision would pass to 518.96 euros. Which means that in this scenario in which there is a more accentuated rise, your installment would suffer a increase of 112.72 euros. However, this would be a progressive increase in relation to the increase registered with each revision, and not immediately.

Also read: Interest rates to rise: How far can I increase my credit?

Is it worth paying off my mortgage with the rise in Euribor?

If you have equity and if the amortization of your home loan does not put your budget at risk, it can be a very advantageous option. After all, at this moment, interest on term deposits is not following the rise in Euribor rates, nor the value of inflation in Portugal.

How does inflation influence my family budget?

So, if you have your money in a term deposit or a savings account, your money is devaluing. Furthermore, with rising inflation and if your income stagnates, your purchasing power will decrease.

In this scenario, if you pay off your home loan, you can gain a new financial break, because not only will it be reduce the amount you pay in interestlike yours monthly installment will be lower. And this provides an optimization in your monthly budget.

However, please note that early repayment of your credit implies the payment of a commission. The fee for early repayment of a loan is charged on a partial or total repayment of a loan. However, by law, banks cannot charge a fee greater than:

  • 0.5% of the capital reimbursed: when the home loan is linked to a variable interest rate.
  • 2% of the capital repaid: in contracts linked to a fixed interest rate.

Although these are the maximum limits, your bank must charge the commission for early repayment stipulated in the housing credit agreement. So, you should look at the contract and calculate the amount you will have to pay before making a decision.

Read also: Reduction of installment or term in housing credit: which is the best option?

How much can I save when paying off my home loan?

When deciding to pay off your home loan, you can save in many ways: in the immediate, reducing the value of your installment, and in the long term, because you will pay less interest.

Use the credit installment simulator after early repayment, to get an idea of ​​the monthly amount you will pay the bank after repaying your credit. But to get an idea of ​​how much you can save, here are some examples:

Imagine you have a home loan with a debt of 120,000 euros and you still have 360 ​​installments to pay. If you have a credit with a 6-month Euribor rate and after your last review you got a TAN (Euribor plus spread) of 1.7%when repaying your loan with 20,000 euros, your monthly installment would go from 425.76 euros to 354.80 euros. That is, monthly would save 70.96 euros.

In case you have 10,000 euros to repay this creditthe installment would pass from 425.76 euros to 390.28 eurosgiving a monthly savings of 35.48 euros. And this savings is only monthly. Do the accounts on an annual basis or even throughout the entire contract.

But if interest rates went up further and your TAN reached 2.5%, would then have a payment to the bank of 474.15 euros. With an amortization of 20,000 euros, reduced the installment to 395.12 euros (saving 79.03 euros per month). With an amortization of 10,000 euros, its provision would pass to 434.63 euros, saving 39.52 euros.

Also read: Housing Credit: Transfer or amortize?

Is it possible to improve my home loan with interest rates rising?

Everything will depend on the current conditions of your home loan. But, as a rule, most customers are able to save when they ask for a review of credit conditions. However, this is a process that requires compare different credit proposals, looking at fees, associated products, among other conditions, if you want to pay off the principal owed.

As a general rule, the transfer of mortgage loans to another bank allows for better conditions, such as a spread lower or a decrease in the value of life insurance, housing credit and multi-risk insurance.

Currently, there are banks that practice spreads of 0.85%, a lower value than was practiced a few years ago. However, even if the new financial entity does not offer the spread minimum, you can benefit from a spread which is around 1%as this is what most banks currently practice.

Do you know what your credit conditions are? It is the ideal time to evaluate all the details and take advantage of more advantageous conditions. that are being practiced on the market.

In terms of insurance, you can contract these two mandatory insurances with an entity other than your bank. And this can mean a annual savings of hundreds of euros. Basically, when you contract these insurances with the bank that grants your financing, you have a bonus on your spread. However, this bonus does not always pay off. when comparing the value of these insurances with other options on the market.

So, if you transfer your credit to a new entity that cover all expenses of this transfer, and still offer a decrease in your spread and value of insurance, will certainly gain a new financial break. This slack will be even greater if, in this process, you decide repay its outstanding principal.

If you need help to improve the conditions of your home loan, you can count on the team at Doctor Finance, which will be fully focused on find the best solutions on the market for you. In addition, you will have a personalized follow-up from the beginning to the end of the process, making this step less bureaucratic and faster. And all the service, at no cost to you.

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