The Consolidated Banking Act gives the debtor of a bank the opportunity to proceed with the early repayment of the loan (total or partial): for those who have the opportunity to put it into practice, this is a very interesting solution, given that it represents for the borrower the opportunity to save interest on future installments ;
there are no penalties for loans taken out after 2007 for the purpose of purchasing or renovating the first home, but for others early repayment involves costs: here is how to calculate the penalty on fixed-rate mortgages.
The maximum penalties for fixed and variable rate mortgages on the first home
When it comes to early repayment of the mortgage, some distinctions must be made based on the date of the stipulation, the purpose and the type of financing. Penalties cannot be foreseen for first home mortgages entered into from 2 April 2007, while for those stipulated before that date (we always speak of financing on the first house) the law establishes maximum limits; here the distinction between variable-rate mortgages and fixed-rate mortgages comes into play: for the former.
The maximum rate for the penalty is set at 0.50% if the extinction occurs before the third last year, at 0.20% if it occurs during the third to last year and is void if it occurs during the last two years of the loan term.
The same limits are applied for fixed-rate mortgages stipulated before the beginning of 2001, but other ceilings are envisaged for those signed after 1.90% for the repayment during the first half of the loan, 1.50% if it occurs between the middle and the fourth to last year, 0.20% if it occurs during the third to last year and 0% if it occurs in the last two years. If the mortgage is not on the first house, different penal clauses can be foreseen.
If the mortgage is at a fixed rate, you need to check what the amortization provides at the time of extinction: if there is a fixed rate at that precise juncture, the rules applied for fixed-rate mortgages apply, if instead at that moment there is è the floating rate the maximum penalties for floating-rate loans will apply.
If higher penalties are indicated on the loan agreement than those provided for by the law, the debtor can request the bank to reduce and adjust the rates and the credit institution cannot refuse.
Early repayment of the total or partial mortgage
With the total early repayment the loan agreement closes definitively (the debtor pays all the sums due to the bank), but there is also the possibility of partial early repayment: in this case the borrower pays only a part of the residual debt and depending on of the type of amortization plan, it will be possible to obtain a reduction in the installments maintaining the duration of the loan or a reduction in the duration of the loan, keeping the amount of the installments constant.
Obviously, in the event of partial extinction, any payment of the penalty will only concern the sums advanced. As a rule, these operations are carried out in conjunction with the payment of an installment.
In addition to the penalty, the early repayment of the loan entails other costs that must be incurred by the debtor: the cost for the administrative calculation of early repayment and the daily tenths, which correspond to an interest rate calculated on the number of days that elapse between the last installment and the moment of extinction.
To understand how to calculate the penalty we will take two examples, one relating to the partial extinction and one relating to the total extinction of a fixed-rate mortgage.
The calculation of the penalty
The residual capital of the loan in progress (which is repaid in installments of 500 USD) is 30,000 USD; you have 5,000 USD available which wants to be used for partial extinction. This sum represents 16.67% of the debt, while the residual amounts to 25,000 USD, or 83.33%.
Depending on the type of amortization plan, the installments can be kept constant, however reducing the duration of the repayment plan, or you can keep the same number of monthly commitments, recalculating the amount (if before the installment was 500 USD, in followed will be equal to 500 x 83.33% = $ 416.65). The extinction penalty is applied exclusively on the 5,000 USD paid in advance.
In this case, the loan expires, with the borrower paying the entire remaining debt to the bank. We refer to a mortgage with an interest rate of 3% and a residual debt which, as in the previous case, amounts to 30,000 USD, while the early repayment penalty is 2%.
If the deadline of the last date was May 31 and you decide to pay off the debt on June 9 you must also calculate the daily tenths: 30,000 (residual debt) x 9 (number of days between the last installment and the extinction) x 0.0082% (daily rate) = 22.14 USD. The penalty amounts to 600 USD (30,000 x 2%), while the administrative costs for counting are usually between 30 and 60 USD.