If you have a mortgage at a variable interest rate but also some savings beyond what is necessary to save any possible trouble or emergency, you may be interested in paying off part of the loan more than a subrogation or novation. This is an option that does not always pay off; it depends on factors such as commissions, the time left to complete the payment and tax incentives.
The first thing that we have to consider to know if it is worth it or not to make advance payments is the profitability that we are obtaining at this moment from that money that we could put in the mortgage. If when it is time to review the quota they are going to apply a higher Euribor to the interest that we are achieving for our savings, it would be worth amortizing.
Another factor in favor of amortization is the tax relief that we will obtain with it. In Bizkaia, the amounts allocated to the acquisition of a habitual residence generate a deduction of 18% in general and 23% for those under 30 years of age and large families. So if the payment of the installments does not add up to the maximum 8,500 euros per year that can be deducted, it may be interesting to make early repayment in order to reach that amount and thereby achieve the maximum possible tax benefit.
On the other hand, it must also be taken into account that the calculation of the interest that we would save by making the amortization varies depending on the time that we have already been paying the mortgage. The sooner we do it, the better. In fact, it is more profitable to reduce the term of the loan than the monthly payment because the longer the mortgage, the greater the total amount that we will have paid as interest at the end. Because? Well, because these are always applied to the amount that is still owed and because in the French amortization system –the most widely used in Spain–, even if you always paid the same, the installments would never really be the same. Each one of them is the sum of two elements –borrowed capital and interest–, which, month by month, vary their weight in the total; in the composition of the former there is more interest than capital, while in the latter the opposite occurs, thus the bank makes sure to collect its revenues.
Finally, we must take into account whether or not the bank can apply an amortization commission for the amount that we are going to put into the mortgage, which is something legal within certain limits and as long as it is contemplated in the mortgage contract.