Is it worth paying off your mortgage early?

What does repaying your mortgage early mean?

Repaying early (amortização antecipada) means using spare cash to **pay down the outstanding capital, paying more than the instalment requires, so you owe the bank less¹. Because interest is charged on the outstanding capital, paying down capital means paying less interest to the end of the loan.

You can do it two ways: a partial repayment (pay down part) or a full repayment (clear the loan at once). This article focuses on partial repayment, the most common question.

Shorten the term or lower the payment?

After you repay, the bank lets you choose what to do with the loan that remains. There are two options, and the choice changes how much you save:

• Shorten the term: keep the same payment and the loan ends sooner. This saves the most interest, because the money you repaid stops earning interest for the whole remaining term.
• Lower the payment: keep the term and pay a smaller instalment. It eases the monthly budget but saves less interest than shortening the term.

Rule of thumb: if the current payment is comfortable and your goal is to save the most, shorten the term. If you need to ease the month, lower the payment (knowing you save less interest).

How much do you save? (worked example)

Say you owe €120,000 at a 3.5% TAN with 25 years to go, making a payment of about €600.75. Without repaying, you would pay close to €60,224 in interest to the end.

If you repay €10,000 early (0.5% fee, i.e. €50):

• Shortening the term: the loan ends about 38 months sooner and you save around €12,697 in interest (€12,647 net of the fee).
• Lowering the payment: it falls to about €550.69/mo and you save around €5,019 in interest (€4,969 net).

Shortening the term saves more than double. Run it on your numbers in the early-repayment calculator.

What about the early-repayment fee?

Repaying early carries a cost: the early-repayment fee. By law it is capped at 0.5% of the capital repaid on variable-rate loans and at 2% on fixed-rate ones². There has also been a temporary exemption for early repayment of variable-rate own-permanent-home credit, so you may pay no fee at all. Because these rules change, confirm the fee in force on your loan's information sheet.

Even so, note the scale in the example: the fee (€50) is a tiny fraction of the interest saved (€12,697). That is why, on interest, repaying early almost always wins.

So, is it worth it?

On interest, almost always: every euro paid down stops earning interest and the fee is small. The real decision is liquidity and alternatives:

• Is the cash genuinely spare? Don't repay what you might need. Keep an emergency fund: borrowing again later is more expensive than the interest you saved.
• Where does it earn more? Compare the interest saved with what you'd earn putting that money somewhere of comparable safety (for example savings certificates or a term deposit). If the loan rate is higher than that earns net, repaying wins.

The saving is bigger the earlier you repay and the higher the rate. With Euribor driving the payment, it is worth revisiting the decision whenever you have spare cash.