Early repayment of the mortgage, yes or no? It is the question that many people consider to save on interest costs and repay the debt in a shorter period. All the more so in a
scenario that sees interest rates in constant growth, with a trend that - for now - seems unstoppable. The possibility of paying off a mortgage before the established term is a prerogative provided for by Italian law, but before deciding it is important to know how it works and what the advantages and disadvantages are.
Early repayment of the mortgage: what it means
The early repayment of a mortgage means the closing of the contract before the due date, or the total repayment of the residual debt. This can be done at any time and does not require a specific reason. Once informed of the intention to extinguish the debt in advance, the credit institution will proceed with the calculation of the early repayment of the loan, which will be made up of the residual part of the debt and any penalties for the early repayment, if provided for in the initial contract. On this aspect it is good to make a clarification. As of February 2, 2007, new loan agreements no longer have penalties for early repayment. For mortgages taken out earlier, there is an agreement that sets the maximum penalties. The borrower can ask for the contract to be renegotiated, but if the bank does not want to apply the lower fees, the borrower can appeal to the Banking and Finance Arbitrator, after having sent a complaint to the bank.
Does early repayment of the mortgage, fixed or variable rate change anything?
Yes, the type of rate (fixed or variable) can affect the penalty to be paid in the event of early repayment of the loan. In fact, the maximum penalties for mortgages stipulated before 2 February 2007 are established on the basis of the type of rate and the date of stipulation.
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Early repayment of the loan: when it's convenient
Early repayment of the loan is convenient when you have a sufficient sum of money to pay off the residual debt with the bank. This way, you avoid paying interest on your mortgage for the remainder of the term and reduce your total mortgage costs. But there are many factors to take into consideration, such as the objective, the number of residual installments, the interest rates, the implied return, the psychological factor and the Euribor rate.
If the loan is close to expiry, paying it off early may not be convenient, or not very convenient, because the residual interest can be small, also because in many cases the composition of the installment - even the fixed one - provides for a higher percentage of interest at the start of the loan rather than at the end.
If there is uncertainty between repaying the mortgage or using the money in other ways, consider whether investing will yield less than the interest saved by paying off the mortgage. If getting out of debt is the priority, paying off your mortgage can be a convenient choice on a psychological level. For adjustable rate mortgages, it is important to monitor the Euribor to understand if it is a good time to pay off the mortgage.
If there are doubts or the available capital is insufficient for a total repayment of the loan, it is also possible to proceed with a partial repayment of a mortgage, which consists in the early closure of only a part of the residual debt. This option is less common than full repayment, but it can be useful to reduce the monthly load of mortgage payments or to reduce the cost of long-term interest.