HomeFINANCEMoney in the bank or amortizing home loans?

Money in the bank or amortizing home loans?

2022 is being marked by the rise of Euribor and inflation. Faced with the inevitable increase in mortgage payments and the cost of living, many Portuguese have doubts about what they should do with their money. So it’s worth it keep the money in a term deposit or is it preferable to repay the home loan?

The answer depends on your goals. But if you want to increase your purchasing power in the face of a inflation around 9% (according to the year-on-year rate of change of the harmonized consumer price index), reducing your credit provision may be the best solution for your personal finances.

If you are torn between these two options, then we explain the pros and cons what you might come across.

Also read: Rising interest rates: Are there advantages for those who have savings?

The rise in Euribor and the rise in inflation in Portugal

Before 2021 came to an end, interest rates were already expected to rise due to the significant increase in inflation. However, with Russia’s invasion of Ukraine at the end of February, expectations grew that sooner or later the ECB, the European Central Bank, would raise interest rates. And even before the ECB made this rise, this context led to a progressive rise in Euribor rates for all maturities.

But in July of this year, confirmation of the interest rate hike ended up arriving and even surprising. For the first time in more than 10 years, the European Central Bank raised key interest rates, ending the cycle of negative interest rates in the Euro Zone. This one increase in interest rates by 0.5% on the part of the ECB came as a surprise, as an increase slightly above 0.25% was expected.

Behind this interest rate hike is an attempt to control inflation in the Eurozone. If we look at Portugal, according to data published by the OECD and the INE shared by Banco de Portugal, in July 2021 the inflation rate was 1.5%. However, 11 months later, Portugal registers, in June 2022, an inflation rate of 8.7%.

As a result of these rises, the cost of living in Portugal is increasing. And in this scenario, the Portuguese begin to lose their purchasing power. After all, the price of energy has gone up, fuel and food as well, and with mortgage payments becoming more expensive, measures must be taken to avoid the risk of indebtedness.

I have a savings account. Is it worth keeping it in a term deposit?

As low as the profitability of a term deposit may be, between having your money stopped in a current account and a term deposit, the best solution is to apply your money into a safe savings or investment instrument. After all, when the money is standing still, it not only devalues, it can decrease. It should be borne in mind that most banks charge monthly and annual commissions.

But this does not mean that keeping the money from a savings account in a term deposit is the best solution. Taking into account the value of inflation, however good the term deposit may be, your savings will lose value. After all, if the inflation is at 8.7% and the average rate on a term deposit is around 0%, the money from your savings will just devalue.

Although an increase in the rate applied to term deposits is expected this year, in an ideal scenario, in 2023 this could reach 1%. And for your money not to depreciate, you needed inflation to be at a minimally identical value at that time.

So, in these situations, you can leave your emergency fund in a term deposit. However, if you have another amount of savings in addition to your emergency fund, it is advisable to think about other solutions to monetize your money or increase your purchasing power. It all depends on your goals.

Also read: Does it make sense to make a Term Deposit at a rate lower than the rate of inflation?

Should I pay off my mortgage with the rise in Euribor?

Paying off home loans can be advantageous if you want to increase your purchasing power. And why does the amortization of your credit influence your purchasing power? Why did I allow you a reduction of monthly charges. Therefore, you have more money left in your family budget, which consequently generates an increase in your family’s purchasing power.

To get an idea, if you have one savings of 10,000 euros and decide to use this amount to pay off your home loan, the impact on your monthly bills can be considerable.

Let’s assume your home loan has 100,000 euros of outstanding capital. if you have one TAN of 1.5 and miss 300 installments of credit (25 years old), your monthly credit installment is currently in 399.94 euros.

If you take the money from your savings and pay off your credit with 10,000 euros, will have a monthly installment of 359.94 euros. If you have a credit indexed to Euribor, you will remain subject to its fluctuationshowever, the monthly charge on your credit will be lower than if you had not amortized this amount.

In another scenario, imagine you have a savings of 20,000 euros and a home loan with an outstanding principal of 150,000 euross. If missing 360 installments and have a 2% TANwould have a monthly installment of €554.43. But with the amortization of 20,000 euros, its monthly installment would drop 13.33%, getting like this in 480.51 euros.

note: Note that, as a rule, banks charge a commission for early repayment, that is, for the partial or total repayment of a loan. However, in housing loans, this commission cannot be more than 0.5% of the capital reimbursed in contracts with variable interest rate. In contracts associated with a flat rate, the limit of commission is 2% of the capital repaid. Look at your home loan agreement and check the agreed commission in case of early repayment.

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

With the rise in interest rates, is it possible to save when transferring my home loan?

In most cases, you can save on your home loan when you transfer it to another financial institution. This is it even with the rise of Euribor. But of course this is not a given. If you are already benefiting from a very low spread, or when your life and multi-risk insurance are priced lower than most offers on the market, it may be difficult to find a better offer.

However, as a general rule, the transfer of housing credit allows you to obtain better financing conditions. After all, nowadays there are banks practicing spreads of 0.85%. But even if you don’t get the lowest spread on the market, most banks are practice spreads around 1%.

In addition, by transferring your home loan to another entity, you can change the contractual conditions of your funding. For example, if you want to opt for a new contract with a shorter or longer term, know it’s possible.

And the same applies to change in the interest regime. That is, if you want to change from a variable rate to a fixed or mixed rate or vice versa. Bear in mind that your monthly installment may increase with this change, as the fixed rate tends to be higher than a variable rate. At least at the beginning of the contract.

Another advantage of transferring your home loan is having the opportunity to contract the Mortgage life insurance or multi-risk insurance in a new entity. Many Portuguese end up contracting these two insurances with the entity that grants the housing credit. In return, the entity lowers the spread associated with the financing. But this bonus does not always pay off. Sometimes, contracting these insurances with another entity allows savings of tens or even hundreds of euros.

Also read: Housing Credit: Transfer or amortize?

Be aware of potential charges with transferring your credit

Before transferring your credit to another entity, be careful, ass there may be associated charges. Although many banks will support the cost of the transfer and of a new deed, there are entities that are not willing to cover these expenses. In these situations you need to do the math and see if the transfer pays off in the long run.

But if analyzing numerous credit proposals and buying costs, commissions and fees is not for you, know that a credit intermediary canr a precious help in this process.

At no cost to you, the Doctor Finance has a team of doctors focused on find the best solutions on the market for your portfolio and goals. In addition to personalized support from the beginning to the end of the process, you can count on a faster process and with less bureaucracy than you would have to face on a personal basis.

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