You are not stuck with your bank for the next 30 years. This is what paying off a mortgage actually looks like
A mortgage loan binds you more tightly than a marriage, a mortgage is the most important financial decision in your life – these are the slogans that novice borrowers often hear. At the same time, we fall victim to several illusions that paint the future in too dark colors.
The vision of a liability that hangs over your head for several decades is an image that often appears before the eyes of people who take out a mortgage loan for the first time. The contract usually includes a distant repayment date, reaching back decades, and in simulations, the total cost amount is hair-raising. To say that repaying a mortgage is an easy and pleasant matter is a gross misstatement. But it is also worth remembering a few circumstances that change the perspective over time.
The total cost never tells the whole truth
“It's good that I didn't take out a loan in 2022. Now the same loan is PLN 200,000 cheaper, I'm already 'ahead'” – such opinions can be easily found in online communities. They show how much importance is attached to it at the beginning total cost of the loan shown by the bank. It is useful for comparisons, but in reality this item, although mandatory in the contract and information materials, always shows untruth. There are at least two reasons.
Firstly, we only know the total cost of the loan “after the fact”, i.e. after the repayment is completed. The amount shown to the borrower is a projection based on today's conditionsi.e. interest rates and indicators. There are no real loans with a fixed interest rate on the Polish market, which means that the cost always remains unknown. If we choose a periodically fixed interest rate, the fate of the interest rate after the first repayment period remains unknown. If we choose a variable interest rate, the projection usually “takes a hit” already in the first months.
Secondly, the total cost is spread over the entire repayment period. Everyone realizes that 100,000 PLN today and PLN 100,000 PLN in 15 years is not the same. These amounts will differ significantly due to purchasing power. Despite this, when we see that we will pay twice as much in interest for the borrowed funds, we automatically think in terms of today's value of money.
The decreasing value of a unit of money over time also affects the real burden of the debt remaining to be repaid. Half a million 10 years ago and half a million today are not the same. In the case of a loan balance, it shrinks not only nominally through repayments, but also in real terms due to inflation.
Check the benefits of refinancing with the calculator on SMART Bankier.pl »
We are not stuck to a schedule
The first years of repayment are usually the hardest. Typically, you not only have to pay off the installments, but also bear the cost of additional insurance required by the cross-selling package. Borrowers often stick to the schedule imposed by the bank, and their home finances come to a halt. Over time, if wages increase and interest rates don't change much, there's a little more slack. You can start repaying your loan “your own way”.
Data from recent years prove that this option is willingly used by borrowers. Mortgages were massively overpaid. This is supported by banks' pricing policy and legal regulations. Firstly, most lenders offering periodically fixed interest rates from the beginning do not charge fees for additional principal repayments. This is the result of caution in the face of unclear rules included in the Act. It's better not to have the Office of Competition and Consumer Protection to worry about, banks seem to think.
Secondly, in the case of variable-rate loans, the law does not allow fees to be charged on overpayments and full repayment after three years of the loan's life. Banks may adopt a more favorable approach for customers (e.g. by offering zero in the price list from the beginning), but in the worst case, after 36 months the customer has full freedom.
Using the overpayment option reduces the total cost of borrowing. This is another reason why it is more of a signal than an actual determinant of how much we will have to pay for the mortgage. Additionally, the strategy of overpaying debt usually leads to shortening the loan period. Even if we do not choose this option with every additional payment, there will be a moment on the horizon when we are one decent overpayment instead of several years of installments away from getting rid of the loan. This is one of the reasons why (in addition to relocations related to the sale of the previous property and refinancing), the average mortgage repayment period is closer to 12-14 years than 25 or 30.
Check the benefits of refinancing with the calculator on SMART Bankier.pl »
One bank for 30 years? There is no obligation
A mortgage loan is not a one-time decision that will last for years also because of the existence of the “secondary market”, i.e possibilities of refinancing the liability. When there are no exit barriers in the form of a fee for full repayment of the loan, you can consider moving to another bank. There are better and worse times to take such a step, depending on the market situation, seniority and the terms of our contract. Today, refinancing is one of the factors driving movement in the mortgage market.
It is worth remembering that full mobility is out of the question in today's reality. Not only costs and formalities, but also the type of loan may be an obstacle. Switching to a variable interest rate when repaying a loan with a periodically fixed rate is not possible. This is the result of the financial supervision recommendations that banks follow.
Transferring a loan to another bank allows you to reduce financing costs and relieve the budget, and sometimes also speed up getting rid of debt. This is also another reason why “having a mortgage” is a process rather than a rigid relationship.
Check the possibility of refinancing with the calculator on SMART Bankier.pl »
