The answer depends on your financial situation. Paying off the loan; shortening the loan term and, in many cases, a mortgage refinance may allow you to secure better terms from another bank.
What happens when you make an extra payment on your mortgage?
Making an extra payment means paying off a portion of the outstanding principal early.
Since interest is calculated based on that principal, the lower your debt, the less interest you’ll pay in the future.
By making prepayments on your mortgage, you can:
- Reduce the outstanding balance
- Pay less interest over the life of the loan
- Choose to lower your monthly payment or keep your payment the same and shorten the loan term
This is a good option for those who have savings available and want to lower the total cost of the loan.
Are there costs associated with prepayment?
As a general rule, banks may charge a fee for early repayment:
- Up to 0.5% of the amount repaid on variable-rate loans
- Up to 2% on fixed-rate loans
Shortening the loan term
In some cases, you can ask the bank to renegotiate the loan term.
- Shortening the term means paying off the home sooner and paying less interest over the life of the loan. However, your monthly payment will be higher.
- Extending the term can lower your monthly payment, but it increases the number of years of the loan and the total interest paid.
This can be a good solution if your financial situation has changed or if you want to adjust the payment to fit your budget.
You can also shorten the loan term by making extra payments, asking the bank to keep your monthly payment roughly the same while reducing the loan’s duration.
For example, on a €200,000 loan with a 30-year term and a 3.9% interest rate, a lump-sum payment of €10,000 could shorten the loan term by about 2 years and 8 months while maintaining a similar monthly payment.
Mortgage Refinancing
You don’t always have to use your savings to pay less.
A mortgage refinance can allow you to:
- Lower the interest rate
- Reduce the monthly payment
- Improve the loan terms
- Tailor the loan to your current needs
If you took out the loan a few years ago, it’s worth comparing the terms available on the market.
So which option is most worthwhile?
It depends on your goals.
As you pay down the loan, you’re reducing the outstanding principal and the total amount of interest you’ll pay the bank, as well as shortening the loan term.
However, the decision depends on your financial situation and your goals. In some cases, refinancing your mortgage may be the best way to secure better terms.
Find the best option for your mortgage.
Try our calculators or contact us via the contact form to receive personalized advice.