Is it Worth Overpaying Your Spanish Loan or Mortgage?
We don’t need to tell you that paying off a loan or mortgage will save money in interest payments, but when is it really worth it and what do you need to look out for?
First of all you’ll need to check your contract as each loan comes with it’s own clauses.
Your contract will indicate whether there’s any charge for overpaying your mortgage or cancelling it, or, in the case of a personal loan, whether it is allowed at all.
In accordance with the law in Spain, from 2011 personal loans have a maximum applicable commission of 1% if the repayment period exceeds one year, or 0.5% for loans to be repaid in under a year. However some companies will let you overpay without any charge.
As regards mortgages there may be one commission for early overpayments and another if you clear the whole amount pending.
If you’re thinking of reducing your mortgage by overpaying, you can choose whether to reduce future monthly payments and end your mortgage on the original end date, or maintain the monthly payments and end your mortgage earlier.
Depending on your circumstances you may prefer one option to another. However if you’re just looking to save money, you’ll pay less overall if you pay back your mortgage earlier (maintaining the monthly amount) rather than reducing the monthly repayments.
Most banks have an online calculator where you can see the effects of either option depending on how much you repay. Input different figures and/or dates to see the results before taking a decision.
For taxpayers in Spain it’s also a good idea to check whether you can take advantage of overpayments by maximising your mortgage tax relief in your annual tax returns (this is no longer allowed for mortgages taken out after 1 Jan 2013).
How Much Can You Save On Your Loan Or Mortgage?
The Bank of Spain offers several free online calculators (in English) where you can calculate your savings, take a look here.
Alternatively get out your calculator and pen and paper (or use Excel) to crunch the numbers. Variables such as the amount overpaid, bank charges (if they exist) and when you carry out the overpayment will all affect the outcome.
It’s a good idea to overpay as early as possible. If you have a 3-year loan, you won’t save much by cancelling it in month 34.
With interest rates on savings at an all time low, it might be the right time to think about putting your money to work for you by reducing your outstanding debts.