The price of freedom: how does early repayment of a mortgage work?
Given the unstable economic situation and fluctuations in interest rates on loans, the issue of early repayment of mortgages is becoming especially relevant for many borrowers. This reduces the financial burden by reducing interest overpayments, experts say. However, only 5% of Russians can afford repayment before the deadline. More than half of them have to save on large purchases, car purchases or vacations to do this. What are the strategies for early repayment of mortgages — in the material of Izvestia.
Joint efforts
Only 5% of Russians have fully repaid their mortgage ahead of schedule. And 67% of them had to save on large purchases, car purchases or vacations to do this. Only a quarter of Russians who closed their mortgages ahead of schedule were able to do so without denying themselves anything. This is evidenced by the data of a study conducted by the Level Group company (available to Izvestia).
Refusing to buy a car is the most common accumulation strategy, as stated by every third respondent (34%). In second place is a reduction in spending on large household appliances such as televisions and washing machines. Vacation savings completes the top 3 of the list. To a much lesser extent, early repayment of the mortgage was facilitated by the rejection of everyday expenses, for example, on clothes, subscriptions to services, coffee and other small things.
Partnership helped many respondents achieve discipline in fundraising — 8 out of 10 respondents (82%) are in a relationship. More than half of them (53%) are officially married. The company attributes this to the fact that it is easier for partners to abandon spontaneous purchases for the sake of a long-term goal.
"One of the spouses has the opportunity to support the other, which means that the couple has additional confidence in the regularity of loan payments. Couples are more likely to discuss budget planning, set goals, and stick to them. In addition, a mortgage is a symbol of stability, and in marriage it is often associated with a common future," the Level Group's press service explained the results.
Repayment strategies
Early repayment of a mortgage loan is beneficial to the borrower, as it reduces the financial burden by reducing interest overpayments, emphasizes Julian Ovechkin, head of the mortgage department at Levelgroup. The money released after the mortgage is closed can be spent on other needs: investments, children's education, and so on.
Fully owned real estate has higher liquidity — it is easier to sell it, donate it, use it as collateral for other loans or inherit it, the Izvestia interlocutor clarifies.
There are two basic strategies for early repayment of a mortgage loan — shortening its term and reducing the monthly payment, says real estate expert, managing partner of Delta estate Elena Zemtsova. A combination of them is also possible — the so-called double early repayment.
— From the point of view of economic benefits, it is more expedient to reduce the loan term, this allows you to reduce overpayments — the lower the total amount of accrued interest, the shorter the loan term. To do this, you must make a monthly payment in full plus the amount on top for the entire term of the loan. The amount of the base payment in this case remains unchanged," the specialist explains.
For tangible savings on overpayment of interest, partial early repayment should be made as early as possible, emphasizes the head of the expert analytics department "Banks.<url>" by Inna Soldatenkova. It is better to deposit funds on the date of the monthly payment, she recommends. In this case, the entire "extra" amount will be used to pay the principal debt. At the same time, even small amounts of 5-10 thousand rubles actually help to reduce overpayments.
Reducing monthly payments, in turn, allows the borrower to reduce the financial burden in the future while maintaining the original loan term, Zemtsova points out. To do this, you need to deposit a fairly large amount once in excess of the monthly payment, which will be credited to the body of the debt. After that, the bank will recalculate the schedule with lower monthly payments.
— That is, if the cost of an apartment is about 16 million rubles, and the monthly payment is 115 thousand rubles, a person can deposit an additional 500 thousand rubles at a time and ask the bank to reduce the monthly payment to 108 thousand. At the same time, he will continue to pay the mortgage for the same 25 years," Ovechkin gives an example.
With a one-time deposit of a large amount, you can choose another scenario, he draws attention. When transferring these 500 thousand rubles to the bank, the borrower may ask to shorten the loan term without changing the monthly payment. Thus, he will not pay interest for the last few years of the loan.
These strategies can be combined, which will save on overpayment of interest and free up additional funds in case of force majeure, Zemtsova notes.
— Under this scheme, the borrower needs to pay a large sum at a time to reduce the size of the payment and continue to make monthly payments in the same amount, — says the expert.
Cost accounting
The choice of repayment strategy depends on the financial situation of the borrower, says Elena Zemtsova. The more confident he is about the stability of his earnings in the future, the more likely he is to close the mortgage as quickly as possible. Secured borrowers usually choose a loan term reduction scheme or a combined method.
In this case, a stable income above the average is needed for early repayment of a mortgage loan, the expert clarifies. This is necessary so that payments do not become a serious burden on the budget, amounting to no more than 20-25% of income.
The maximum secure financial burden in mortgage lending is considered to be up to 35% of income, says Julian Ovechkin. It is desirable that after depositing this amount, a person has 30% of income left to pay for household expenses and 10% for force majeure.
— The remaining 10-30% can be used for early repayment. At the same time, it is important that a person has a financial cushion equal to the amount of three to six months of habitual expenses. You should not give away your last savings for early payment.: This is a risky financial strategy," warns Izvestia's interlocutor.
For borrowers who are not sure about the stability of their earnings, and those who will have to increase their expenses in the future, the strategy of reducing payments is more suitable, Zemtsova believes. But even in this case, the income at the moment should be above average, which will allow you to accumulate a large amount for a one-time deposit.
You can use bank deposits for this purpose. However, this will not be a universal strategy for all mortgage borrowers, since many of them, even in conditions of high deposit rates, preferred early mortgage payments, Inna Soldatenkova draws attention. The approach chosen by the borrower depends on the date and program of the mortgage, as well as deposit conditions.
The bets are placed
At the last meeting, the Central Bank made a serious statement, lowering the key rate for the first time in three years, recalls Ruslan Pichugin, an independent expert in the field of private investment.
— This step represents an important event demonstrating the regulator's willingness to move towards a more flexible and lenient monetary policy. This decision is due to a number of positive economic indicators, such as a decrease in inflation, stabilization of the ruble exchange rate and a decrease in lending rates," he notes.
Despite the positive trends, a high degree of uncertainty remains due to external factors and the general market situation. The expert expects the beginning of the next stage of mitigation of the PREP no earlier than the second half of 2025. By the end of the year, the rate may drop to 18-19%, but it will depend on many factors.
The reduction in mortgage rates, which will begin after the key rate cut, will have a positive impact on the mortgage market, Elena Zemtsova believes.
— Some major players have already started to reduce loan rates, including mortgages. Discounts on mortgage programs range from 2 to 3.5%, depending on the terms of the loan. These measures led to a reduction in the minimum mortgage rate for the purchase of real estate in new buildings to 22.4%, for secondary housing to 22.8%, and for individual housing construction to 23.8%," says Pichugin.
However, this is more relevant for new loans. The reduction in the key rate will not affect the terms of existing loans, since the interest rate is fixed in all agreements and cannot be changed either up or down, believes Julian Ovechkin.
— However, the borrower always has the opportunity to apply in writing to his bank for a reduction in the interest rate under his loan agreement, if the credit institution reduces interest rates under a similar program for new clients, — the interlocutor of Izvestia draws attention.
Changing conditions
If the lender bank has refused to do this, it makes sense to apply to another credit institution under the refinancing program, recommends Julian Ovechkin.
There are no legal restrictions on the number of refinancing procedures for one mortgage today, he clarifies. Therefore, the main thing is to monitor the decline in rates on the market and apply when banks begin to adjust conditions following the next decision of the Central Bank.
However, the reduction for this should be significant, since a reduction of 1-2% will not significantly change the situation, Zemtsova is convinced.
— Refinancing becomes really profitable if the difference in rates is at least 5% or more. In this case, you can save on interest. In the rest, the financial and time losses for reissuing the loan, paying notaries and appraisers are not comparable with the benefits received, the expert warns.
There are other situations in which refinancing is not profitable. Among them, the interlocutor of Izvestia highlights the registration of preferential loans and the re-crediting of loans in which more than half of the term has passed.
In general, in order for the mortgage market to really come to life, it is necessary to reduce mortgage rates to at least the size of a barrier — 15-17% per annum, Zemtsova is sure. This percentage is still high, but psychologically it will be perceived better than 28-29% per annum.
— In the near future, such a scenario is unlikely to be realized: the inflation rate remains high, and the Central Bank of the Russian Federation will not be able to reduce the key rate so much. Borrowers with financial capabilities will do their best to close the mortgage quickly, regardless of the size of the rates on it," the expert summarizes.
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