Mortgage and housing

Paying off a mortgage early

The interest you stop paying when you prepay principal on a mortgage, in the two ways it can be done and what each one costs.

What it does

It starts from an outstanding principal, an interest rate and a term, and simulates what happens if you repay an amount right now. The difference between the two options decides the entire result. If you reduce the payment, the term stays the same and you pay less each month. If you shorten the term, the payment stays the same and you finish paying sooner. They are two different accounts over the same euros, and this calculator does both and shows them.

It then subtracts the fee your contract charges you, and displays in plain sight the cap that the law allows to be charged for an early repayment, along with the article and the conditions under which that cap applies. The detail also includes the interest that would still be left to pay and the rate of return at which an investment would break even against that decision, so that the large figure can be compared with what the money that was not prepaid was earning.

Key concepts

• Early repayment: prepaying principal on a loan with French amortisation. The payment becomes that of a smaller loan with the same term and the same interest rate, or the payment is kept and the debt ends sooner. What changes is what stays the same.
• Cutting the payment is not shortening the term: they are two different decisions. With 150.000 € at 3 % over 240 months and 20.000 € prepaid, reducing the payment saves 6.520,68 € in interest and shortening the term saves 14.499,90 €. That is almost 8.000 € of difference for the same contribution, and the reason is that in the first case you keep paying interest over the same 240 months while in the second you stop paying it sooner.
• The cost of prepaying: many of them refund a percentage of the capital prepaid and others a fixed amount. The fee is calculated on what you prepay, not on what you have left, and it is subtracted from the savings because it is money leaving the same pocket. If the fee is higher than the savings, the result comes out negative: that is a fact of the arithmetic, not an error.
• The legal cap in article 23 of Ley 5/2019: it sets the maximum that can be charged for an early repayment. On a fixed-rate mortgage it is 2 % for the first ten years and 1,5 % from then on. On a variable-rate one there is no single percentage: the contract chooses between 0,25 % for the first three years and 0,15 % for the first five, so the calculator shows the maximum for each band. On top of that, compensation cannot exceed the financial loss the lender has.
• The financial loss: the lender may be entitled to compensation for the cost of cancelling the loan early, and that entitlement can never exceed the loss it actually incurs. It is a legal limit. This calculator cannot work it out, because it depends on how your loan is written.
• Constant assumptions: the interest rate you enter applies to every month of the calculation. A variable-rate mortgage is reviewed, so the result is an account with a constant interest rate, not a forecast of what is going to happen. This is stated on the field label so that it is not read as official data.
• The other half of the account: the money you do not prepay could be somewhere else. The detail calculates what rate of return that money would have to earn to match the savings, and that is a calculation of two numbers, not advice on where to put anything.

Sources

• Ley 5/2019, on residential credit contracts, article 23, consolidated text in the BOE. The fee caps shown are those of that article.
• The payment and the amortisation schedule use the same account as the [mortgage payment](/herramientas/hipoteca) calculator, with the French amortisation system and the annual interest rate divided by twelve.

Frequently asked questions

What is the difference between reducing the payment and shortening the term?

It is the difference between the two accounts this calculator runs, and the reason it exists. When you reduce the payment, the term stays the same and you pay less each month, but interest keeps accruing over the same 240 months. When you shorten the term, the payment stays the same and you stop paying sooner, so interest accumulates over less time. That is why the same amount prepaid saves much more by shortening the term: 14.499,90 € against 6.520,68 € with 150.000 € at 3 % over 20 years and 20.000 € prepaid.

When does the legal fee cap apply?

Article 23 of Ley 5/2019 governs contracts signed from 16 June 2019. On a fixed-rate mortgage, the maximum is 2 % of the capital prepaid during the first ten years and 1,5 % from then on. On a variable-rate one, the article gives no single percentage: it leaves each contract free to choose between 0,25 % for the first three years and 0,15 % for the first five, so the maximum for each band is shown here. In addition, compensation can never exceed the financial loss of the lender.

Why do the years I enter not tell me whether the cap applies to me?

Because the calculator only knows how many years have passed since signing, not in which year the contract was signed, and those are different things. To find out whether article 23 applies to you you have to look at the signing date in your deed or your contract. The calculator shows the cap that would correspond to the years you declare and states it in the row itself, but it does not take for granted that your contract falls within the law.

What happens if my fee exceeds that cap?

A row appears saying that the fee in your contract exceeds the legal cap for your case, with the percentage of the cap next to it. It is a fact of the arithmetic, not advice: what the lender charges and what the law permits are two numbers that are compared. The large figure already deducts the fee you declared, so the savings you see are what is left after paying it.

Why is the fee calculated on what I prepay and not on what I owe?

Because that is what is charged: the cost of prepaying is a percentage of the capital you advance, not of the whole debt. With 20.000 € prepaid and a fee of 0,5 %, the fee is 100 €; if it were calculated on the 150.000 € outstanding it would be 750 €, and the large figure would tell you that the savings are six hundred and fifty euros lower than they really are.

What happens if I prepay the entire outstanding principal?

Repaying the whole outstanding principal is indeed a full early settlement and extinguishes the loan. This calculator only simulates partial prepayments: it requires the contribution to be lower than the outstanding principal, and it returns an error if it is equal. A total cancellation would require considering the applicable compensation and, if you want to release the registry charge, the mortgage cancellation formalities, which are not calculated here. That is why the partial result cannot be extrapolated directly.

Is the result useful for a variable-rate mortgage?

As an account, yes: it tells you what would happen if that interest rate stayed constant for the whole term. As a forecast, no. A variable-rate mortgage is reviewed, and the result depends on the rate applied at each review, which this calculator does not project because it uses no series of rates. The interest rate field says so with an "(assumption)" in its label so that it is not confused with official data.

What is the rate of return at which an investment breaks even?

It is the account that puts both options on the same footing. If the money you do not prepay is somewhere else, the figure tells you what rate of return that money would have to earn to match exactly the interest saved. With a 3 % mortgage and a 19 % IRPF, the break-even point is 3,7037 % before tax. It is arithmetic with two numbers you enter yourself, not an assessment of where it is best to put the money.

Do the chart curves show both scenarios?

Yes, and that is the way to see the difference. The outstanding principal line without prepayment reaches zero in month 240; the contribution line arrives earlier: in month 199 if you shortened the term. The distance between the two lines is the savings, drawn month by month. If you chose to shorten the term, the second line stops at month 199 because the debt is already settled and there is nothing left to draw after that.

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