When you come into extra money (a bonus payment, an inheritance, the sale of an asset), one of the most common financial decisions is whether to put it toward an early mortgage repayment. The answer isn't automatic: it depends on your loan's interest rate, the alternative investment options available, and your personal situation.
What making an early repayment means
Making an early repayment means paying off part of your outstanding mortgage capital ahead of the agreed payment schedule. Unlike a regular payment, where part goes to interest and part to principal, an early repayment goes entirely toward reducing the outstanding capital.
Lowering the payment vs. shortening the term
When you make an early repayment, the bank usually offers you two options:
- Lower the monthly payment, keeping the original term. Your monthly payment drops, but you keep paying for the same number of years.
- Shorten the term, keeping the monthly payment. You finish paying off the mortgage sooner, but your monthly outlay doesn't change.
In terms of the loan's total cost, shortening the term almost always generates more interest savings than lowering the payment, because the capital stops accruing interest sooner. Lowering the payment, on the other hand, has the advantage of increasing your available liquidity every month right from the start.
When paying down the mortgage beats other alternatives
The key question isn't just "do I have spare money?" but "what else could I do with that money?" Making an early repayment is, in financial terms, equivalent to earning a guaranteed return equal to your mortgage's interest rate, risk-free and tax-free (because you're avoiding paying that interest, not generating a taxable gain).
This means paying down the mortgage tends to pay off more the higher your mortgage's interest rate is. If your mortgage has a low interest rate, other alternatives (investing, an emergency fund, other higher-interest debt) may offer a better risk-return trade-off than an early repayment.
The fees the bank can charge
Spain's Real Estate Credit Contracts Law caps the fees for early mortgage repayment:
| Situation | Maximum fee |
|---|---|
| Variable-rate mortgage, repayment within the first 3 years | 0.25% of the capital repaid (or 0.15% within the first 3 years depending on the contract) |
| Variable-rate mortgage, from year 4 onward | 0% (no fee) |
| Fixed-rate mortgage, first 10 years | Up to 2% of the capital repaid |
| Fixed-rate mortgage, from year 10 onward | Up to 1.5% |
It's worth always checking your specific mortgage deed, since these are the maximum legal limits, but each contract may have more favorable terms.
Before you pay down your mortgage, have an emergency cushion
Making an early repayment permanently reduces your available liquidity: once the money goes toward reducing capital, you can't get it back without taking out a new loan. That's why the general financial recommendation is not to make early repayments until you have an emergency fund covering at least 3-6 months of expenses, so you're not exposed if something unexpected comes up.
Calculate the impact of an early repayment
With our mortgage calculator you can see your full amortization schedule and estimate how your payment or remaining term would change depending on how much capital you decide to pay down early.