A mortgage consists of many more or less important parameters. A good loan, matching the individual situation, is the result of several different factors. Of course, everyone is looking at startup costs, interest rates or additional products required. Among them, it is particularly worth paying attention to the costs associated with early loan repayment.
Properly realized overpayment gives you the chance to significantly reduce interest costs and shorten the loan period. So the effect that most people care about. At the same time, people skip this parameter when choosing a mortgage. A well-chosen bank offer can generate really big savings in this matter.
What is loan overpayment?
Loan overpayment is the payment of an amount greater than specified in the installments schedule. Overpayment should go to capital repayment. Early loan repayment can be partial or total. It should be remembered that banks have their own individual rules for overpaying capital.
How does early repayment work?
Early repayment is made from the capital itself + current interest + possible commission. What is current interest? Assuming that you repay the loan on the 10th day of each month, and you want to make the overpayment on the 20th day, the funds from the amount allocated for the overpayment go to interest that accrued between the 10th and 20th day of the month. What remains is written off from the capital and the loan itself is recalculated.
This is the case in most banks, because there are situations in which the bank reserves the possibility of overpayment at the earliest on the day after the date on which the regular installment is repaid. You can also come across banks that, regardless of the day of overpayment, will transfer all funds to the capital write-off. However, these are purely technical solutions which, in general,
Shortening the loan period or lowering the installment?
Each bank has the option of reducing the installment while maintaining the loan period. In some banks, you can additionally choose to shorten the loan period while leaving the installment amount before the loan overpayment. What to choose? Here, unfortunately, everyone has to make their own calculations. If the current installment is at an acceptable level for us, I recommend shortening the period. This gives the most measurable interest benefits, and in the installment itself a better ratio of capital to current interest.