Paying off a 30-year mortgage of €150,000 today boosts earnings by over 5.5% and will be higher the higher the policy margin
The interest rates that serve as the basis for calculating the mortgage installment have been rising for a year. And they do it at a speed never seen before. The 12-month Euribor, for example, went from negative values until March to trade above 3.3% today. In less than a year, the interest rate rose more than 330 basis points.
For families with mortgages, the calculations are easy to do: a 30-year loan of €150,000, with a 12-month Euribor index of 1.2% spread, had an installment of €462 last January and today, after the rate review at the end of December , the installment increased by 59% to 736 euros.
To mitigate the impact of rising interest rates, families can (and should) try to renegotiate the mortgage with the bank through a margin and insurance review, choose to defer principal and/or extend the term of the policy . . But no solution has a bigger impact on your pocket than paying off debt.
Taking the aforementioned credit figures and the current interest rate as a reference, paying off €20k would mean an immediate €98 reduction in your monthly mortgage payment. Over a year, amortizing €20k would create a saving of €1,177, equivalent to investing the same money in an app that offered 5.9% net of tax.
But be careful: this is not a savings that can be reduced in a single year, but over the entire contract. This means that paying off the €20k of this mortgage would generate savings of over €35k. There is nothing on the market capable of delivering profits of this order so safely. And what’s more extraordinary is that the profit boosted by credit amortization doesn’t stop there.
In addition to the fact that partial repayment of the balance makes it possible to reduce the total cost of the loan, since the repayment amount no longer capitalizes interest in favor of the bank in the remaining years until the end of the contract, it also allows significant savings with life insurance.
In the case of a 30-year-old couple, with a loan in these conditions, this would mean a saving of 28 euros in the first year, according to simulations with the insurance company April, the largest intermediary and brokerage group in Portugal. It seems like a little, but this amount increases rapidly with age, since the price of a life insurance policy is tied to both the outstanding amount of the mortgage and the age of the policyholders.
Paying off mortgages is for many families the best deal they can make this year. And it is not because the government suspended the payment of the commission for the early repayment of mortgage loans in the year 2023. But because it allows significant savings in the present and in the future, especially in a period characterized by a continuous increase in interest rates, as many expect .
However, it is very important to ensure that the money used to repay the debt does not leave the family financially unprotected against the occurrence of any financial emergency such as unemployment.
To prevent this from happening, it is important to ensure that the outflow of money, to reduce the debt to the bank, does not leave the accounts undercapitalized and that the family’s emergency fund continues to be able to withstand at least six months of fixed expenses from the family budget.