When talking about mortgages in Spain, an early repayment charge is a penalty paid by the customer when they repay part of the mortgage. It can put some people off making mortgage repayments. However, it is a small cost that usually allows us to save a lot of money in the long term. In this post, we tell you all the key points to bear in mind about mortgage repayment charges in Spain.
What is the early repayment charge?
When making a mortgage repayment (i.e. paying part of the money we owe the bank for the mortgage in advance) the bank charges us a commission for this operation. This fee is called an early repayment charge and is limited by the Spanish mortgage law of 2019.
What is the maximum early repayment charge?
As it is limited by the Spanish mortgage law of 2019, the early repayment charge can never be higher than the following:
Variable mortgages
For variable mortgages, the early repayment charge will be set based on one of the two following options:
- 0.15% of the money repaid: during the first five years of the life of the loan.
- 0.25% of the money repaid: during the first three years of the life of the loan.
Fixed mortgages
For fixed mortgages, the early repayment charge may not exceed the following amounts:
- 2% of the money repaid: if repayment takes place during the first 10 years of the life of the loan.
- 1.5% of the amortised repaid: if repayment occurs from the tenth year onwards.
Considering the difference in fees depending on when the operation is carried out, we can calculate when is the best time to make mortgage repayments in each case and situation.
Why does the bank charge early repayment charges?
One might think that it does not make much sense for the bank to charge us for this operation if we are paying back the money we owe. However, we have to remember that when we pay the money back early, the interest on the mortgage must be recalculated taking the money we still owe the bank as a reference (which is less). As a result, the interest we will pay to the bank for the remaining part of the loan will be less, so the bank will lose money.
In other words, by paying back the money early, the bank stops charging part of the interest that it had planned to charge. It, therefore, charges us this fee to compensate. However, we must bear in mind that we can save a considerable amount of money, which means that making a mortgage repayment is a very attractive option if we want to reduce our level of debt and, in addition, save money by paying the bank less interest.
How much does my mortgage go down if I make a repayment?
It depends on how much you've repaid and the type of mortgage you have. In short, when a mortgage is partially repaid the interest is recalculated taking part of the remaining capital that still has to be repaid as a reference. In other words, to calculate the early repayment charge, the interest is recalculated based on the part of the money that we still owe the bank.
As such, if we make a considerable repayment, our mortgage will also be reduced; and, if the repayment were smaller, the reduction would also be. In this sense, if we are going to make a mortgage repayment because we have enough capital to do so (for example, from savings or inheritance), it is generally best to repay as much as possible, as it will help us to pay less interest and reduce our level of debt.
However, it is important to remember that we should only make mortgage repayments when we have liquidity. In other words, money is in the bank that we can access if we need it.
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