In a context where interest rates on savings products have fallen sharply and no longer yield worthy returns, we began to be contacted by readers asking whether or not it would be worth paying off their credits, especially housing credit.
In this article we will give you some arguments and present a tool that allows you to make your accounts to make a more informed decision.
Are you available?
The first question you have to ask yourself is if you have the liquidity available to pay off your credit. In this case, we are not talking about possible low value savings that may exist because it is important not to forget that before repaying your credit you must have an emergency fund to guard against eventualities in the future.
If you have your family budget checked, if you already have an emergency fund set up then it might make sense to move on to the next few questions. If not, we suggest you see how to balance your family budget to make room for savings.
What is the Return on Non-Risk Applications Today?
In Portugal, the return rates of risk-free products (eg rates of best time deposits or savings certificates) are not higher than 1%. We are not talking here about the marketing strategies of some banks that promote their bank accounts by offering promotional rates close to 3% but lasting only for 3 months.
When talking about risk-free savings products, we are talking only about term deposits, savings certificates and savings certificates – the latter are sold in CTT and are much more interesting than traditional time deposits.
What is the Interest Rate on My Credits?
The third question is the identification of all your credits and the interest rates you support in each of them. For a better identification of your household credit, we suggest that you check your credit and your spouse’s credit map – you only need your tax ID and password to access the finance portal.
After identifying your credits you should see in your homebanking or in your bank statements what interest rates you pay on each of the credits and any commissions for early repayment. You can send us your responsibility map to get an opinion on the ways to lower your benefits.
How to choose?
After collecting the information, you should use our credit amortization simulator and understand which alternative is the most advantageous, never forgetting:
- Savings pay taxes and debt reduction do not;
- Debt reduction should be seen as a long-term investment with immediate return;
- If you need money in the short term it may not make sense to write off debt with lower interest rates;
- If you do not have the discipline to save it is more advantageous to write off credits even if the rate is low – a bird in the hand is better …
What to Complete?
If you already have an emergency fund and if you do not expect to need your money in the short term the alternative for the repayment of some credits can be very beneficial. Of course, the higher the rate of your credit, the more attractive it will be to reduce your debt. Thus, if you have credits with rates above 5% -7% it will always be more advantageous to write them off.
If you have mortgage credit with old spreads (below 1.5% spread) it will make sense to keep your savings or create savings accounts with term up to 5 years (where rates are more interesting). At the end of the term we will see how the ERR Credit will be, as it may make sense to write off at that time. In this case it will never be worth amortizing the credit.
Do you have credits but do not want to pay off?
If you have credits but do not want to write them off because of prudence or for any other reason, but if you wanted to lower your installments it might make sense to know the negotiation of credits. In several cases it is possible to lower your interest rates on your credit and installments without having to make a new credit. And believe that it is even possible to lower your financial benefits.