Receiving money: saving or paying off your home loan?

A cash inflow generally gives rise to a partial reimbursement, unless this is large enough to cover all of the principal remaining due. In this case, we will talk about a full refund.

Of course, this possibility remains rare in the context of a young mortgage given the amounts borrowed.

The less capital and interest remains

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Conversely, the older the loan, the less capital and interest remains; a return of money is, therefore, more likely to give rise to a total refund.

Typical situations leading to full reimbursement are …

  • Sale of real estate
  • The renegotiation of the interest rate with the repurchase of the credit by another bank

For partial reimbursement, this is mainly…

  • The return of money
  • Soliciting current savings

Adapted compensation costs

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Did you mention the prepayment fees when signing your loan? Most of the time, the bank will charge you this fee.

But do not worry: these are negotiable and certain situations mean that these fees do not apply, namely…

  • Sale of the real estate following a change in the place of the professional activity of the borrower or his spouse
  • Dismissal of borrower
  • Death of borrower or spouse

But what fees are we talking about? They are capped at 3% of the capital remaining due and correspond to six months of interest on the amount reimbursed. This cap allows you to pay prepayment fees adjusted to the progress of your loan: the closer you are to the latest monthly payments, the less you will pay fees.

For what savings?

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Rest assured: despite these costs, prepaying your loan can save you a lot of money.

  1. Take the following example: you have taken out a loan of $ 130,000 at a rate of 2.20%, the repayment of which over 20 years makes you pay monthly payments of $ 670
  2. You have a cash inflow of 15,000 $

 

  • You reduce the duration of your loan without reducing the amount of your monthly payments. Your loan will, therefore, be reduced by 34 months. This represents a saving of $ 22,780 *.
  • You reduce your monthly payments without reducing the duration of your loan. Your monthly payments will, therefore, decrease by $ 78. This represents a saving of $ 18,720 *.

This second option, therefore, appears more suitable for borrowers seeking above all to reduce the amount of their monthly payments. However, the overall economy is less attractive than that promised by the first option.

Savings put to the test

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As you know, the rates for savings accounts and passbooks do not tend to increase. At first, glance, embarking on a prepayment procedure seems to be the most attractive solution.

Be careful however to take into account all the elements detailed here before making your decision: the number of compensation costs, as well as the type of early repayment (total or partial), are decisive.

Note also: the majority of banks do not accept early repayment if the amount allocated to this operation is not equal to at least 10% of that of the loan.

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