How to Pay Off Mortgage Early and Save Money: Tips + Calculations

Whether you are buying an apartment or taking out a loan for a car, find out at the bank if you can reduce the payment amount or the repayment term. We asked two experts, Olga Konzelевskaya and Inna Semko, which option is more profitable and how it works. The post includes calculations, and at the end there are tips for everyone preparing to apply for a mortgage.

Inna Semko — Expert. Specialist in the field of mortgages. Shares useful tips in her Instagram @banki_naiznanky

With partial early repayment, two situations can arise:

• You make early repayment on the payment date. Then you pay the monthly payment amount according to the schedule + the amount for early repayment. Everything is clear here: the entire sum goes toward early repayment, and the payment in the next month decreases.
• You make early repayment on any other day. Then one part of the sum goes toward interest, and the other part — to the principal debt.

Why do you pay a larger amount, but it is still charged to interest?

Let's say you make repayment 11 days after the last payment. In that case, the bank calculates interest for those 11 days and deducts it from your sum. The payment amount in the next month will decrease.

Example: the payment of 20,285.33 rubles consists of the principal debt amount (5,568.71 rubles) and interest (14,716.62 rubles). The payment date is the 20th of each month. Let's take the November payment as an example.

Calculate the interest for using the loan in this month: 14,716.62 (interest) divided by 30 (number of days in a month) = 490.55 rubles.
To find out how much is deducted for 11 days, multiply this amount by 11. The result is 5,396 rubles.

In the next month, the payment will be 19,321.49 rubles. Look at the chart below and pay attention to how the principal debt and interest are distributed: after deducting 5,396 rubles that you paid this month.

Olga Konzelевskaya — Expert. Specialist in mortgage issues with over 12 years of experience. Shares useful tips in her Instagram @ipotekapro

Of course, early repayment is always beneficial: it reduces both the principal debt and the total overpayment. There is also a small hack: even if your bank does not provide for reducing the term (only reducing the payment), it's not that scary.

Example: Your standard monthly payment is 30,000 rubles. You want to make an early repayment and pay 100,000 rubles. Your monthly payment is reduced by 1,000 rubles — now you owe 29,000 rubles.

If you continue to pay 30,000 rubles instead of 29,000 and write a statement for partial early repayment for the difference of 1,000 rubles (this must be done always to ensure payment goes toward the principal debt — through your personal account or at the bank office), then you will have the same early repayment as if your term was shortened.

What is more beneficial: reducing the payment or the term?

When choosing a bank, always pay attention to whether you can shorten the loan term — it's much more beneficial. To make it clearer, here is an example with numbers.

Example:

• loan amount — 2 million rubles;
• term — 15 years (in many banks it is 182 months, not 180);
• interest rate — 12%;
• monthly payment — 23,910 rubles;
• overpayment on interest — 2,351,140 rubles (if no early repayments are made).

After six months of using the loan, you have 500,000 rubles. You decide to reduce the monthly payment amount.

Pay the full sum on the seventh repayment month on the payment date to the bank: 523,910 rubles (500,000 — early repayment and 23,910 — monthly payment). The next month, this payment will be reduced to 17,705 rubles. If you do not make any more early repayments, the overpayment on interest will be 1,802,713 rubles over 15 years.

The difference in interest overpayment is 548,427 rubles. That's your savings for having paid 500,000 rubles once.

What if you decide to shorten the loan term? You will also pay 523,910 rubles on the seventh repayment month on the payment date. The next month, your payment will remain the same: 23,910 rubles. However, the loan term is shortened from 182 months to 107! On the 107th month, the payment will be only 7,010 rubles.

Thus, instead of 15 years, you will close the loan in just 8 years and 9 months. The overpayment on interest will be 1,041,470 rubles if you do not make any more early repayments.

Then the difference in interest overpayment will be 1,309,670 rubles!

+ Tips for everyone planning to apply for a mortgage

Make sure to check your credit history — whether everything is in order with it. This can be done for free on the website of any credit bureau. Four main trusted resources: NBKI, BKI, OKB, and "Russian Standard".

You can check your debts on the website http://fssprus.ru/ — current delays over 10,000 rubles may be a reason for credit rejection.