Early repayment of a mortgage: how to pay off a bank profitably

We tell you what early and partial early repayment of a mortgage is in 2024 and how to make payments with the bank correctly

Often, customers are afraid to take out a mortgage for a short period of time due to large monthly payments, uncertainty about the stability of the economy and their financial well-being, so they prefer to be safe and initially apply for a loan for a longer period.

“Since 2022, there has been a tendency to increase the average term of a mortgage loan. Customers are increasingly applying for a loan for a period of more than 25 years, — says Alexey Novikov, Director of the Mortgage Lending department at Est-a-Tet. — This is due to the solvency of customers. They strive to reduce the credit burden, reduce the amount of monthly payments.”

Vadim Butin, head of the mortgage lending department at Glavstroy-Real Estate, adds that, despite the deadline chosen according to the documents, some real estate buyers repay the mortgage at least one and a half to two times faster.

We tell you which schemes of early repayment of housing loans are most beneficial for borrowers and how to repay a mortgage correctly.

In this article, we answer the following questions:

When is it profitable to repay a mortgage ahead of schedule

Russian banks provide their borrowers with the opportunity to repay a mortgage loan ahead of time, either in full or in part. The benefit of early repayment directly depends on the remaining loan term — the closer to the end of the loan term, the less profitable it is to repay the mortgage ahead of time. In the long run, it is more profitable to shorten the period. But if you choose to reduce the monthly payment, the savings can be felt immediately.

“It is possible to reduce the total amount of overpayment by early repayments, which is especially important during the first third of the loan’s life. Banks adhere to the annuity payment scheme, so the borrower primarily repays interest first, and not the loan body itself,” explains Natalia Kuznetsova, General Director of the Bon Ton real estate agency.

All Russian banks provide their borrowers with the opportunity to repay a mortgage loan ahead of schedule — either in full or in part (Photo: fizkesshutterstock)

According to the law

Early repayment is prescribed in Federal Law 284 dated 19.10.2011. The amount of the loan provided at interest to the borrower may be refunded ahead of time in full or in parts, provided that the lender is notified of this at least 30 days before the date of such repayment. The agreement may set a shorter period for notifying the bank. The decision must be notified to the bank in advance, otherwise the payment will not be counted and it will be credited next month.

Options for early repayment of the mortgage

There are several options for early repayment: reduce the size of the monthly payment, the mortgage term, or combine these two schemes. To choose the appropriate option, the mortgage provider must assess what is more important for him — to pay less money to the bank or reduce the amount of the monthly payment in order to reduce current expenses.

Shortening the term of a mortgage loan

The option of shortening the loan term is the most profitable to minimize overpayments. When the term is shortened, the part of the monthly payment that goes to repay the principal increases and the part of the interest decreases. Further repayment is more dynamic, as less interest is accrued on a smaller amount, and the overpayment is reduced.

Reduction of mortgage payments

When the payment is reduced and the term is maintained, the balance of the principal debt is stretched for the remaining period, while the schedule is rearranged in such a way that most of the monthly payment goes to repay interest, and a smaller part goes to the principal debt.

“In general, it is more profitable for borrowers to agree to reduce the loan term, since in this case the amount of overpayment to the bank (i.e. accrued interest) is reduced. However, each borrower determines for himself which of the options for partial early repayment of the mortgage is more convenient for him, because when making this choice, several important factors must be taken into account (life situation, current financial situation, etc.),” says Irina Vekshina, mortgage lending consultant at Inkom—Real Estate.

The combined version

The ideal option is to alternate the reduction of the term / amount of payment, that is, as if knocking the payment from both sides, making the term and payment as comfortable as possible for an even greater financial opportunity to make early repayments, Kuznetsova believes.

If the budget allows it, then you can make a large one-time payment and reduce the amount of the mandatory payment, while continuing to pay the full amount that was set earlier. These small overpayments will also be early repayment, due to them, the payment period can already be shortened.

This scheme is convenient because, if difficult times come, the borrower can pay the minimum mandatory payment, and reduce the loan term and overpayment in those months when it is convenient for the budget. The downside is that the final overpayment of interest will be greater than in the case of shortening the loan term.

There are several options for early repayment: reduce the size of the monthly payment, the mortgage term or combine these two schemes (Photo: Primakovshutterstock)

Russians are losing interest in early repayment of mortgages

Experts attribute the decrease in interest in early repayment of mortgage loans to high deposit rates in banks, which is where Russians prefer to keep their free money. In addition, borrowers have fewer funds that can be spent on early repayment of a mortgage loan.

Read more: Russians have lost interest in paying off their mortgages early. What does it mean

Calculation examples

The Est-a-Tet real estate agency provides an example of calculating the benefits of various schemes for early repayment of a mortgage loan. For example, with a loan amount of 9.25 million rubles and a term of 25 years (300 months). at 18% with a monthly payment of 140.36 thousand rubles. the overpayment of interest over 25 years will amount to 33.29 million rubles.

Imagine that the debtor has 500 thousand rubles. for early repayment in the first month. If the term is shortened (but while maintaining the monthly payment of 140.36 thousand rubles), the loan term will be reduced by 9 years, and the amount of overpayment will be reduced by 16.07 million rubles. And if the payment is reduced for the same period of 300 months, the payment will decrease to 132.8 thousand rubles. (by 7.55 thousand rubles), and the amount of overpayment — by 2.24 million rubles.

“It is more profitable to shorten the loan term, since the amount of the principal debt is reduced directly, and the interest for the unused period is burned out. At the same time, with a decrease in the monthly payment, the amount of early repayment is directed, among other things, to interest repayment, and only to a lesser extent to the principal debt,” explains Alexey Novikov.

Terms of early full and partial repayment

When making an extraordinary payment, it is necessary to notify the bank. As a rule, an application for full early repayment of the loan must be written at a bank branch. In case of partial repayment in most banks, an application can be submitted online — through a mobile application or online banking. It is important to take this point into account, since without a statement, the transferred amount simply goes to a credit account, from which monthly payments will be debited according to the schedule — in this case, the overpayment will not decrease at all.

For example, in Sberbank, you can start paying off a mortgage ahead of schedule starting from the second day of the loan. When paying on the Sberbank Online website or in the application, you can deposit an amount of at least 30% of the monthly payment as an early repayment, and any amount at the bank’s office.

No additional documents are required for early repayment — everything can be arranged on the Sberbank Online website or in the application. Just go to the “Loans” section, select your mortgage loan, then click “Transactions” and “Repay ahead of time”. After that, you need to select the account from which the funds will be debited, mark in the drop-down list what the borrower wants, shorten the term or amount, and specify the amount of funds that will be debited against early repayment. An application for early repayment is generated automatically.

How to make payments

When paying off a mortgage early, one important point must be taken into account. “If the borrower deposits an amount aimed at partial early repayment of the mortgage on the date of the monthly payment, then this entire amount will be spent on reducing the so-called loan body. And if later, at least for a few days, then funds for using the loan will be deducted from this amount,” says Vekshina. For example, the borrower makes a monthly payment on the 12th of each month. He contributes the amount of 250 thousand rubles, which is completely spent on repayment of the loan body. If, with partial early repayment, the client provides these funds, say, on the 16th, then interest for using the loan will be deducted from this amount within four days (from the 12th to the 16th), and the remaining funds will be used to pay off the debt itself.

In case of full early repayment of the mortgage, the borrower submits an application to the bank stating that he wants to repay the mortgage loan ahead of time. The Bank calculates the amount required for this (together with interest on the maturity date). The borrower deposits funds in the account, and on a certain day the bank writes off the amount of debt and closes the mortgage loan. This usually happens on the date of the next monthly payment.

When making an extraordinary payment, it is necessary to notify the bank. As a rule, it is necessary to write an application at the bank’s branch for full early repayment of the loan (Photo: fizkesshutterstock)

Mortgage repayment at the expense of maternity capital

Early repayment of the mortgage can be made both at the expense of own funds, and at the expense of maternity capital or subsidies for large families — both partially and completely. In case of early repayment at the expense of maternity capital, the amount of the monthly payment is reduced. It is impossible to choose a shorter period in this case, the press service of Sberbank explained. In addition to the application to the bank, it must be submitted to the Social Fund of Russia (SFR) a package of documents for transferring funds to repay a mortgage loan. The application can be submitted remotely both on the official website of the SFR and on the portal of public services.

Documents required for the SFR when paying off a mortgage with maternity capital:

If the decision of the Social Fund is positive, then it is necessary to send an application to the creditor bank and agree with it exactly how the maternity capital will be used when repaying the loan. The amount can be used both to repay the principal debt and mortgage interest.

Is the insurance refunded in case of early repayment of the mortgage

In case of early repayment of the mortgage, borrowers have the opportunity to partially recover the amount paid as an insurance premium. And if the buyer makes early repayment at the beginning of the year, then most of the insurance amount is returned to him, at the end of the year — a smaller part, says Vekshina from Inkom-Real Estate.

Also, the insurance company deducts from the refunded amount a part of the funds — about 25% of the amount of insurance — that were spent on servicing the insurance contract (paperwork, salaries to employees, deductions to the bank, etc.). Suppose the borrower pays 50 thousand rubles. for insurance, while he manages to repay the mortgage ahead of schedule within six months after the loan is issued. As a result, he can get back half of the amount he spent on insurance. However, another 25% of 50 thousand rubles must be paid to the insurance company, after which the borrower remains 12.5 thousand rubles.

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