When you apply for a loan , one of the most important things to understand is what the amortization rate is. In how many installments will the credit pay? How much are you repaying for each benefit you pay?
When you take out a loan, you set up a repayment period with the financial institution , which will determine the amount of the monthly installment to be paid. This monthly installment is composed of two installments: one of capital and another that includes interest , taxes, insurance and commissions.
The depreciation rate refers to the percentage of the capital that was actually paid to it by the bank. However, when you pay your monthly installment you are not only paying off capital – you are also paying interest, taxes, insurance and commissions to the bank.
For example, imagine that your monthly installment is 200 euros and in the first month the interest rate was 30%. In that month, its amortization rate was only 70%, that is, it only repaid its debt at 140 euros. The remaining 60 euros were interest.
The amortization rate varies according to the type of interest rate chosen for the loan, which, in the case of housing loans, can be contracted with a fixed or variable rate .
In the payment of fixed rate interest payments, the same percentage is charged during the credit repayment period, rather than in variable rate loans, where interest rates fluctuate. Usually, the interest rate begins to be higher and decreases as the benefits are paid.
In this way, the amortization rate also changes. In the first few months it is usually smaller, but as the amount of interest is paid, over the months, the percentage of amortization increases.
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Although the initial contract with the bank sets a certain time limit and a number of installments to pay off your loan, the institution grants you the right to make an early repayment, if you can, to repay part or all of the debt before of the loan.
Partial early amortization
Partial early repayment allows you to reduce part of the amount of outstanding capital and thereby reduce the interest payable on your loan, leading to a reduction in the value of monthly installments.
To make the early repayment, you must notify the financial institution at least seven days in advance. The amount is amortized on the day the benefit is due.
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Total early amortization
The total early repayment of a housing loan occurs when payment of the outstanding amount is made in full before the term stipulated in the contract.
This amortization can be made at any time during the contract, and the client must inform the credit institution at least 10 working days in advance.
Normally, banks charge a commission for the early repayment of the mortgage loan. By law, this commission can only have the maximum value of 0.5% of the capital reimbursed, if the contract is with variable interest rate, or 2% of the capital reimbursed in fixed interest rate contracts.
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The case of Jorge and Rita
Jorge and Rita asked for a housing loan of 120 thousand euros. The initial agreement stipulated an APR of 1.17%, with a 40-year term, monthly installments of 311 euros and a variable interest rate, which would represent a MTIC (total amount charged to the consumer) of 149,959 euros.
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However, five years have passed and Rita has received a bonus of 5 thousand euros in her work and wants to use that amount to repay part of the loan in advance.
It notified the bank, seven business days in advance, of its intention to settle its debt amount.
The couple had already paid 60 installments, meaning that it still had 107,795 euros of capital to repay and 23,509 euros of interest to pay.
With the early amortization, after 5 years, the loan of the couple passed the following values:
It is also necessary to take into account the mode of interest rate applied. In the case of Jorge and Rita, the interest rate is variable, that is, the couple only had to pay a commission of 0.5% on the amortized amount.
If the interest rate were fixed, this value would rise to 2% of the amortized capital.
If the contract were fixed rate, the couple would have to pay an early redemption fee of 100 euros, which would cause the total cost of credit to rise to 27,773 euros.
However, the couple’s credit agreement is with variable rate, which means they will have to pay 25 euros early repayment commission. Adding this amount, the cost of Jorge and Rita’s credit will be a total of 27,698 euros.
Thus, the early repayment of 5 thousand euros represents, for the couple, a total saving of 2.262 euros in the total amount of their credit. This savings relates to interest that the couple avoided paying for having amortized this amount in advance.
If Jorge and Rita are able to maintain the rate of benefits of 311 euros (before depreciation), they can set aside the difference of the new benefit (296 euros) so that, after a few more years, they have already joined enough to redeem and thus save more on the loan.