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Buying a home is part of the future projects of many peoplehowever, its acquisition involves a large outlay of money that should not be taken lightly and that in most cases applying for a mortgage becomes an essential step.
In this sense, runaway inflation, electricity prices at historic levels and the high cost of fuel have caused the purchasing power of citizens is reduced, making loan repayment terms tend to extend for decades.
Throughout the life of the mortgage, the owner of the home carries out an amortization, that is, pays the money that has been lent by a bank in advance before the maturity of said loan. However, is it better to use the savings that a person has after acquiring the mortgage to amortize it or should they be invested elsewhere?
This doubt is recurrent in those people who have begun to pay the mortgage, since if the money is kept in the bank, this will not give much return, so the most advisable thing is to use it to remove the debt through amortization or get a higher return through the investment of financial products.
Although the main advantage of investing savings is that with them you can get a higher return on capital than invested, this is not always the case, as losses can also be recorded. For this reason, it is best that people who choose this option allocate money that they will not need, especially in the short term.
What are the advantages of repaying a mortgage?
Unlike investment, in which a person can lose the money invested, when repaying the mortgage, the main advantage is that the level of indebtedness is reduced since part or all of the debt is eliminated, which in the latter case would mean the cancellation of the mortgage.
This amortization can be carried out in two different ways:
- Amortize the time: In this alternative, people make use of this amortization when the loan is shortened, so the time for which the bank must continue to be paid is reduced. The installments that are paid monthly are the same, however, as this time is shortened, the interest will be calculated for a smaller debt, reducing it.
- Amortize the principal: Instead, in this alternative, a person uses the savings to reduce the money owed to the bank, but without modifying the time in which the remaining amount will be returned. Therefore, the monthly fee paid is lower, but it will remain in force for the same time. In the long run, this option won’t save you much in interest, and you’ll still have long-term debt.
But, Which of the alternatives could be more interesting? Is there a perfect time to make this amortization? Regarding whether it is better to amortize capital or time, this will depend on the personal circumstances of each client. In the case of capital, the person will pay during the same time that was planned, being the best option to clean up the family economy and get more comfortable at the end of the month.
On the contrary, if it is decided to amortize the time, the same installments will be paid in less time, being the best option if you want save money in the form of long-term interest or if you want to settle the debt with the bank as soon as possible.
Regardless of the alternative chosen, amortization is preferable to carry out at the beginning of the loansince as during the first part of the loan more interest is paid, and in the final part more capital is paid, in this way, the person will remove more interest than if they make it at the end.
What is better to pay off the mortgage or save?
As a general rule, there is no option that is clearly more positive than the other, but it will be necessary to take into account all the characteristics of each one of them to know which one is more convenient for the person in question.
The financial profile of each person It is a determining factor, since if you have a more conservative profile, it is normal to play it safe, so paying off the mortgage will be the most recommended option; while if you take risk better, the savings can be invested with the objective of obtaining a higher return for them.
The financial status and home economics of the person It is also an aspect to take into account, since if a family has a hard time making ends meet, repaying a mortgage will mean reducing the money owed to the bank, improving this situation, since it will have to pay a smaller amount in the monthly installment to pay the mortgage.
Also, the debt level It is a relevant aspect, since if this is high, the ideal is that the savings that are held are used to reduce said indebtedness rather than to obtain benefits, so the most advisable thing is to use them to pay off the mortgage.
Lastly, it is vital to consider the need to have short and medium term liquidity regardless of whether the mortgage is amortized as if they invest the savings; since that implies losing access to that money quickly and easily. Therefore, if liquidity is needed in the short or medium term, it is best to reserve part of it instead of spending it all.
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