As a result, the total amount of interest that will end up being paid over the life of the loan will increase. That is, the loan It’s going to be more expensive in the long run. and, furthermore, the monthly effort required is greater (less disposable income in the short term). On the other hand, if this increase in interest rates occurs when there are few installments left to pay, it affects a much lower principal, so the increase in interest affects it to a much lesser extent.
The Euribor, reference for variable mortgages in Spain
The 12-month Euribor, the indicator to which most variable rate mortgages in Spain are referenced, closed the month of August at 4.102%.
Although it is true that 10 or 15 years ago the bulk of new mortgages signed in Spain were at a variable rate – comfortably above 90% -, in the last 5 years, that percentage has been reduced to an average of approximately 50%, according to data from the Bank of Spain. Therefore, the number of mortgages that are seeing their payment increase significantly due to increases in interest rates is lower than if we had a scenario similar to that of the great financial crisis.
This would explain – together with the resilience of employment and the lower level of family debt, among other factors – that the volume of defaults at the system level has so far been more limited than in the previous crisis.
Pay off early?
The fact that interest is always calculated on the amount of the loan that remains to be repaid explains that in the first years more interest is paid, a relationship that is reversed. in the final stretch of the loan termthey explain from the Bank of Spain.
Taking this information into account, strategic decisions can be made such as the convenience of paying off part (or all) of the debt in advance at a given time.
The Spanish Mortgage Association (AHE) indicates that early repayment is an unconditional right that the borrower has. Although its application may entail the payment of compensation. These early repayments hardly represent significant savings in the event that the reference interest rate is low. In these cases, it will be necessary to assess whether the interest savings offset the effect of the amortization commissions that the entity granting the loan will charge, if any. On the other hand, if the rate is high and the forecast is that it will continue to rise, the decision to amortize can mean savings in the medium and long term.
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