Paying off a mortgage loan early

How to pay off your mortgage early?

The most common way to take out a mortgage loan is to take it out for as long a term as possible, since the amount of monthly payments does not limit the borrower’s financial budget so much. Some of them plan to pay off their mortgage early in case such an opportunity arises. This procedure requires depositing funds into the account in an amount equal to the amount of the early payment. If you repay early on the day of payment of the monthly installment, you must also take into account its amount.

ATTENTION!

To complete the transaction, a simple transfer of money to the account is not enough: you must submit a corresponding application to the institution that issued the loan. The bank will write off the transferred funds as monthly payments in accordance with the schedule, since it does not have the right to withdraw amounts greater than those specified in the agreement without your permission.

Early repayment of a mortgage involves several steps:

1. Notifying the bank of its intentions. Within the specified period (specified in the agreement, usually no earlier than a month before the funds are returned), contact the bank with an application for making a payment for early repayment of the loan. The document must indicate the amount of the voluntary contribution. Many institutions provide a standard form for this transaction. The application can be submitted either at a bank branch or using online resources. Please note that some organizations only accept online applications. Sberbank has a customer service system for this (Sberbank-online), and VTB has a personal account and a call to the call center.
2. Depositing money. You can do this in any way convenient for you. When transferring from an account at another bank, be aware of the increased transaction fee. Funds must be deposited into the account linked to the agreement before the expiration date of the early payment. In this case, there is no need to wait for the moment of payment of the principal debt.
3. Confirmation of successful completion of the operation. If the bank does not send you a notice of enrollment and an updated payment schedule, contact the institution's employees to obtain documents. In case of full repayment of the mortgage, you must be given the entire package of necessary documents for the subsequent cancellation of the loan registration record. This mark is placed only if the subject of the loan was a security deposit for the mortgage loan.
4. Mark in the registration record about early repayment. This step is only relevant after the mortgage has been fully repaid. The entry must be canceled no later than 3 working days without paying a state fee.

Early repayment of mortgage

Early repayment of a mortgage is beneficial to the borrower and not beneficial to the lending bank. After all, with annuity payments at the beginning of payments, the borrower pays most of the interest, while the debt itself is repaid very slowly and up to 90% of the funds paid go to servicing the debt. Therefore, many conscientious borrowers, if possible, try to repay the principal debt ahead of schedule.

Such early repayment of a mortgage loan is not profitable for the bank. It is more profitable for him when the borrower pays exactly on time: he neither advances the schedule nor lags behind it, which brings him a stable and predictable profit. If the money is returned ahead of schedule, then there is a need to involve it in circulation, which complicates the planning of cash flow. Early repayment of a mortgage loan during the first period of servicing is especially critical for the bank, since the bank has done some work on its organization and expects a certain profitability on it.

Because of this, banks make it as difficult as possible for early repayment of a mortgage, especially in the initial lending period.

However, on November 1, 2011, Federal Law of the Russian Federation dated October 19, 2011 No. 284-FZ came into force, which prohibits banks from introducing moratoriums on early repayment of a loan to an individual.

The federal law amended Art. 809 of the Civil Code of the Russian Federation, which at that time allowed for early repayment of a loan only with the consent of the lender. Taking advantage of this opportunity, banks included conditions in mortgage lending agreements under which early repayment of the mortgage within a certain period from the date of receipt of the loan (most often 3 - 6 months) was either completely prohibited, or was accompanied by the requirement of an additional fee - a commission or a fine.

Now, for early repayment of a mortgage loan, the consent of the lender is not required, however, there is a legal requirement for the borrower to notify the lender of full or partial early repayment of the loan at least 30 days before the repayment date. “Not less” means that this period can be reduced by a separate clause in the mortgage loan agreement.

Thus, in the event of early repayment of the loan, the bank has the right to receive from the borrower only interest accrued up to and including the day on which the loan is repaid.

Law No. 284-FZ establishes that the effect of the updated provisions of paragraph 4 of Art. 809 and paragraph 2 of Art. 810 part two of the Civil Code of the Russian Federation applies to credit agreements and loan agreements concluded before the day it came into force.

That is, the amendments have a retroactive effect and if the current mortgage agreement contains any restrictions on early repayment of the loan, from November 1, 2011, this part of the agreement will cease to be valid.

Particular attention should be paid to the features of early repayment of a mortgage specified in the mortgage lending agreement, since it is important for the borrower how the bank revises the terms of further lending in case of partial early repayment. Most often, the interest remains the same as it was, but the loan term is reduced. But there are banks that will allow you to choose: reducing the monthly payment or reducing the loan term.

It should also be borne in mind that the amount of the annual insurance premium also depends on the amount of the principal debt. Therefore, partial early repayment of a mortgage loan also entails a reduction in the burden of insuring the mortgaged property, since the mortgagor is obliged to insure this property at his own expense in an amount not less than the amount of the mortgage obligation.

Thus, after partial early repayment of the mortgage, it is necessary to provide the Insurance Company with information about the balance of the principal debt in order to recalculate the schedule of insurance premiums and insured amounts and conclude a new Addendum to the insurance contracts.

A good source for partial early repayment of a mortgage loan is the property tax deduction for a mortgage in the amount of up to 260 thousand rubles. on the property and 13% of the amount of interest paid.

Why pay off your mortgage early?

A mortgage loan can be repaid in two ways: using annuity and differentiated payments. When repaying using the first method, the bulk of the required monthly payment goes to pay interest. Over time, the situation changes: a large amount is spent on the body of the loan, and the interest rate on the loan decreases. Differentiated payment in mortgages has lost popularity, so not all banks provide it. The convenience of this method lies in the simplicity of the calculations, while complex formulas are used when calculating the annuity payment.

Early repayment of a mortgage has a number of undeniable advantages: the smaller the amount of debt, the less interest is charged on it. The borrower will receive the greatest benefit if he repays early in the first years after taking out the loan, but not everyone has this opportunity. Even small payments will ultimately have a positive impact on the amount of debt and the period of its payment, allowing you to save money. For the annuity method, there are two options for early repayment: reducing the term and reducing the payment.

What are the ways to pay off your mortgage early?

There are two main methods for partial early repayment of a mortgage:

• shortening the loan term;
• reduction in monthly payment.

You can choose one or alternate. Let's figure out what the pros and cons of the listed repayment methods are.

Reducing the loan term

In this case, monthly payments will remain the same, and the mortgage term will be shortened. This will enable you to pay off the loan earlier than originally stated in the contract.

Choose repayment with a shorter term if you are satisfied with the current amount of payments and you are confident that you can continue to repay these amounts on schedule without any problems.

Reduced monthly payment

With such early repayment, the mortgage term remains unchanged, and the additional amount paid only goes towards reducing future payments. This way you can continue to repay the loan on more lenient terms.

It’s important that you won’t be able to close your mortgage early just by reducing the payment. The savings on interest overpayments will be much less than if you shorten the mortgage term.

Example.

We have a mortgage of 4 million rubles. at 6.5% for 12 years. We will make an early payment of 180,000 rubles. in the first month of the loan. We use both methods in turn (we first reduce the term, then the payment) and compare:

From a financial point of view, shortening the loan term is much more profitable. However, reducing the monthly payment also has benefits - it is a kind of safety net for the borrower in case of job loss and other unforeseen circumstances. At the same time, nothing prevents you from depositing the saved difference ahead of schedule with a reduction in the term.

For example, you reduced the payment from 30,000 to 25,000 rubles. If your financial situation allows, you can continue to deposit the same 30,000 rubles ahead of schedule. (RUB 25,000 according to schedule + RUB 5,000 as early payment with a shorter period, required with notification).

This will help you close your mortgage earlier and not miss out on the savings. And if it suddenly becomes difficult to repay the loan, you can return to the “reduced” schedule - and there will be no delay. This is the very safety net for which it is worth reducing the monthly payment.

Repayment in two ways at the same time

Most banking institutions allow their clients to use several methods for early repayment of a mortgage. In cases where the borrower is able to make regular payments, which, in turn, are not limited by the contract, both options are economically identical to each other. If you repay with a reduced payment amount, you can reinvest the savings toward your next monthly installment. In percentage terms, such savings will be equal for both methods.

The second option is best suited for unforeseen circumstances, because in this case the debt burden in the form of a monthly payment will be less. If you are sure that you will not face any financial difficulties in the future, there is no difference in the methods of early repayment. For those wishing to foresee the possibility of a decrease in income, it is worth paying attention to payment with a decrease in the amount of the payment. In this case, if difficulties arise, you can always return to standard payments according to the schedule.

Early repayment of mortgages in various banks

If we consider such a large credit institution as Sberbank, then we can confidently say that there will be no problems with quickly repaying a mortgage in such a bank. In order to begin the return procedure, you need to submit a standard application to the credit department, which will indicate the return date, amount and current account number.

You can repay your mortgage at Sberbank on any working day, and the institution does not set a limit on the repayment of amounts, and does not regulate the timing of early payments. In addition, when carrying out such an operation, no additional commission is charged.

VTB 24 Bank also provides its clients with comfortable conditions for early loan repayment. The bank establishment does not establish limited terms for urgent repayment. An application for such an operation can be submitted one day before the return is made.

How to apply for early repayment?

When submitting an application directly at a bank branch, be sure to indicate which of the two methods of early repayment of a mortgage you choose. An employee of the institution will give you an updated payment schedule immediately on the spot. You can draw up and submit an application at any time, but if you want to link early contributions to the date of mandatory monthly write-offs, this must be done no later than 24 hours before the next scheduled payment. Keep in mind that the document will not be accepted on the day the loan is issued or the mandatory monthly payment is made.

IMPORTANT!

To successfully consider the application, you must repay all existing loan debts. Otherwise, the amount deposited into the account for early repayment will not be accepted and will remain there until the next scheduled debit.

As a result of partial early payment, the bank must reduce the monthly payment or reduce the loan term. This circumstance depends on the repayment method chosen by the borrower in the submitted application.

What are the risks of early repayment?

Many debtors, in the hope of quickly repaying the loan, take rash actions that can only aggravate the situation. This comes from basic illiteracy. In order not to cry later, stumbling over the pitfalls of the credit system, it is recommended to balance the payment schedule as early as possible.

Quite often, individuals try to send an amount slightly higher than the required amount on account of the next payment, but such tactics are completely pointless. It is better to save up funds for several payments and discuss new return conditions with the bank.

It is worth noting that quick repayment of a mortgage loan is not entirely beneficial to the bank. In this case, the credit institution loses on interest, so the lender will try in every possible way to prevent such a situation. With the help of various contractual obligations, banks make the procedure for early repayment almost impossible. Financiers apply the following measures:

• A minimum period is established after which early repayment is permitted;
• The amount of contributions is limited;
• Additional requirements are being introduced requiring people to notify in advance of their intention to urgently repay the mortgage.

Lawyers question the establishment of such prohibitions and advise challenging the current situation in court.

In addition, the legislation has a rule that exempts the borrower from obtaining official permission from the bank for early repayment of the mortgage.

In this case, the borrower must notify the financial institution of his intention one month in advance.

In any case, when deciding on early repayment, you should not immediately aggravate the situation by going to court. First of all, you need to try to find an acceptable solution through negotiations with the bank. In any situation there is a way out, the main thing is to find it in time. As part of the preparatory activities, it is recommended to carefully study all the clauses of the agreement and consult with a qualified lawyer involved in mortgage lending.

If the parties have not come to an agreement, or the clauses of the agreement are in doubt, then first of all it is necessary to submit a claim to the bank, and only then draw up a statement of claim. Quite often, when the bank learns of the borrower’s intention to seek help from the court, the issue is resolved pre-trial.

As it turned out, early repayment of a mortgage loan is a very real action permitted by law. The issue of full or partial repayment of the mortgage must be resolved by the bank within one month.

Where can I get money for early repayment?

In order to answer this question, you must have financial literacy. Such a person will always effectively distribute funds between his needs, and, if necessary, cut expenses and save. On the way to deciding to take out a mortgage loan, it is important to be aware of whether you are able to make the required monthly payment and bear responsibility if your financial situation changes. If you accept the risk of a decrease in income, reduce the amount of the desired loan; in the opposite situation, reduce the term.

The possibility of early repayment of the mortgage is your advantage, but you should not overestimate your strength. It's a good idea to have a few potential monthly write-offs in reserve in case of unforeseen circumstances, as there are strict penalties for late payments. All savings from paying early contributions are eliminated.