How to pay off a mortgage ahead of schedule: reduce the term or payment

2024 Author: Malcolm Clapton | [email protected]. Last modified: 2023-12-17 03:44

The life hacker calculates all the options to figure out which loan repayment strategy is more profitable.

For calculations, we will take a mortgage loan in the amount of 1.2 million rubles at 10% per annum for a period of 8 years (96 months). Suppose that every month you have free 5 thousand rubles that you want to use for early repayment.

Conceptually, these calculations will work for your situation as well, but for the exact numbers you will have to do the calculations yourself.

How to pay off a mortgage with annuity payments more profitable

With annuity payments, you give the bank the same amount every month to repay the loan. At the same time, the payment structure is not the same in different months. Usually at least half of it is percentages at first - see your payout schedule for the exact proportions.

In our example, the monthly payment is 18,209 rubles. In total, you will need to give the bank 1,747,546 rubles with an overpayment of 547,546 rubles.

Early repayment with a shorter term

If you pay an additional 5 thousand rubles a month and shorten the loan term, then you will save 171,647 rubles on interest payments and pay the bank in full in 5 years and 8 months.

Early repayment with a decrease in payment

If you reduce the payment, then you will save 103 540 rubles, pay off the mortgage in 7 years and 8 months. At the same time, in recent months, your payment will be so small (less than 5 thousand rubles) that you practically will not feel it.

Repayment with a decrease in the monthly payment and an increase in the early payment

Early repayment with a reduction in the term of the mortgage seems more profitable: you save more, pay off all the debt to the bank faster. But when calculating for a strategy with a decreasing payment, there is one but: the difference between the initial monthly payment and the decreased one usually falls out of the spotlight.

For payments with a reduced term, you continue to pay 18,209 + 5,000 rubles and part with 23,209 rubles. When you decrease the payment, you start with the same amount and gradually go to 1,874 + 5,000 = 6,874 rubles.

But you can add to the amount allocated for early repayment on a monthly basis, the difference between the original and current payments.

And in this case, you magically pay off the mortgage on the same date and with the same overpayment as in the early repayment with a reduction in the term.

If one day your financial situation deteriorates, you can postpone early repayment at any time and pay the decreased amount monthly. With early repayment with a shorter term, you are deprived of this luxury.

In addition, some banks allow partially repaying a mortgage online only with a decrease in payment, and to shorten the term, you will have to go to a branch. If a face-to-face meeting with the employees of the credit institution is not for you, this repayment option is perfect.

conclusions

1. If you are sure that you will always have money for the initial main payment and 5 thousand for early repayment, it makes no difference for you how to repay: with a reduction in the term or with a decrease in the payment according to the third option, if you give the same amount monthly …
2. If you anticipate that the financial situation may deteriorate in a couple of years, choose an early repayment with a decrease in payment and taking into account the difference between the original payment and the current one. There will be problems - you will move on to payments according to the schedule, and you will have to pay significantly less monthly than at the start of the mortgage. There will be no problems - pay off the mortgage as quickly and with the same benefit as those who repaid it ahead of schedule with a reduction in the term.
3. If the mortgage is still a heavy burden for you, but you are ready to somehow cut out 5 thousand rubles a month, go by reducing the payment. So you will repay the loan for the same 8 years, but gradually it will become easier and easier for you. And you can save a little.

How it is more profitable to pay off a mortgage with differentiated payments

Banks rarely offer differentiated payments, but it is still possible to take out a mortgage loan with such conditions. In this case, the amount of the principal debt is divided into equal parts, interest is charged monthly on the balance of the debt. Therefore, the amount of the payment is gradually decreasing.

For the mortgage from our example in such a situation, the overpayment will be 484,958 rubles, the payment in the first month - 22,500 rubles, in the last - 12,604 rubles. To calculate the benefit, let's use one of the sites with loan calculators, for example.

Early repayment with a shorter term

In just 5 thousand a month, you will reduce the interest overpayment by 137,121 rubles and pay off the mortgage in 5 years 8 months. At the same time, every month you have to pay less and less amount due to differentiated payments.

Please note that the calculator does not include early repayment on the first payment. However, if it were possible, the numbers would change slightly.

Early repayment with a decrease in payment

With a reduction in the size of the payment, the process also goes towards reducing both parameters, albeit not so quickly. This is due to a decrease in the share that goes towards repayment of the principal debt on a monthly basis.

It turns out that with this approach 94,196 rubles will be saved, you will pay off the mortgage in 7 years and 1 month.

Repayment with a decrease in the monthly payment and an increase in the early payment

It makes no sense to calculate the difference between the original payment and the current one: it is formed mainly due to a decrease in interest. And the payment will be so and so reduced depending on the enthusiasm with which you will pay off the main debt.

conclusions

1. If you are satisfied with the size of the share of the principal debt in the payment structure, shorten the loan term. In any case, the amount of the monthly payment will decrease faster than initially, due to the reduction of the balance of the principal debt.
2. Reducing the payment significantly delays your relationship with the bank - in this particular case, for 1 year and 7 months. At the same time, the monthly payment for the first time does not decrease as quickly as we would like: for payments without early payments after a year of the mortgage, its size will be 21,405 rubles, for early payments with a decrease in payment - 20,345 rubles.