In the ever-evolving financial landscape, the notion of early mortgage repayment has once again captured public interest. Recent online discussions, particularly on platforms like Weibo, have surged with questions about regret associated with the decision to pay off home loans ahead of schedule. While a few claim to have encountered liquidity crises after clearing significant debts, others express dismay as housing prices plummet shortly after early repayment, leaving their homes worth tens of thousands less than anticipated.This shift in sentiment is noteworthy. Just a couple of months ago, conversations surrounding early mortgage repayment revolved around trends like "the surge of early repayments" and the ongoing discussion of whether banks would impose stricter requirements on borrowers looking to pay down their loans earlier. But now, it seems that public opinion has drastically turned. The People's Bank of China (PBOC) has recently announced a reduction in existing mortgage rates, prompting many to reconsider their repayment strategies.On September 29, the central bank revealed an average decrease of approximately 0.5 percentage points in existing mortgage rates. Media reports suggest that this adjustment might save borrowers a staggering 150 billion yuan in interest expenses, benefiting around 50 million households. To provide a clearer picture, a borrower with a 1 million yuan mortgage over 25 years was previously paying an interest rate of 4.4%. Following the adjustment, this rate dropped to 3.55%, resulting in a savings of over 140,000 yuan in interest payments.This evolution in thought signals a crucial shift: once people viewed early mortgage repayment primarily as a way to strengthen their financial balance sheets, many now recognize that the capital they held could potentially yield better returns elsewhere. As such, discussions about the wisdom of paying off mortgages early are more prevalent than ever.Before delving deeper into the pros and cons of this financial maneuver, it is essential to clarify a few fundamental aspects surrounding home loans. Typically, mortgage repayment can occur through two primary methods: the equal principal method and the equal principal and interest method. Most borrowers aiming to repay their mortgages early do so under the assumption that they are reducing their overall interest burden, yet many may not fully grasp how interest payments are calculated.For example, consider a scenario where the annualized interest rate for a mortgage stands at 4.1%. On a 1 million yuan loan with a 30-year term, one might assume that the yearly interest amounts to 41,000 yuan. However, this assumption is misleading. In reality, the interest paid each year is not as starkly straightforward. Banks utilize the remaining principal amount to recalibrate interest payments for future months, meaning that the actual interest varies monthly based on how much of the principal has been paid down.In the case of the equal principal repayment method, the monthly principal amounts remain constant, but the interest diminishes over time as the remaining balance reduces, resulting in gradually decreasing total payments. Conversely, with the equal principal and interest approach, borrowers pay a constant total each month, initially offsetting more interest and less principal, then switching towards paying off greater principal amounts as the loan matures.Using a 1 million yuan loan as a reference, the total interest paid via the equal principal method would amount to approximately 1.6167 million yuan compared to 1.7395 million yuan under the equal principal and interest approach; thus, borrowers can see that, all else being equal, the equal principal strategy can result in lower interest costs.However, whether using the equal principal or equal principal and interest repayment methods, the calculated interest depends on the remaining principal adjusted against the interest rate, resulting in substantially lower figures than one might normally expect from initial estimations. So if a borrower opts for early repayment, which repayment method allows for greater savings?When it comes to early repayments, two distinct strategies exist: maintaining the original number of repayment terms but reducing monthly payments or keeping monthly payments steady while reducing the loan's term. While the former alleviates monthly financial burdens, the latter facilitates earlier loan clearance. Regardless of the chosen path, the result remains the same; borrowers aim to minimize total future interest payments.For instance, consider an individual purchasing a property for 3 million yuan and making a 30% down payment of 900,000 yuan, leaving a mortgage of 2.1 million yuan at an interest rate of 3.6% over a loan term of 30 years. Under the equal principal repayment plan, the first month payment would be roughly 12,133 yuan, diminishing each month until the last payment of 5,850 yuan, resulting in a total interest of 1.13 million yuan. Alternatively, under the equal principal and interest repayment, the borrower would pay a steady 9,547 yuan each month, culminating in a total interest of 1.33 million yuan.In the situation where the borrower applies 600,000 yuan from savings to repay their loan early, and if following the equal principal route while keeping monthly payments the same, a potential savings of 320,000 yuan in interest can be realized. On the other hand, maintaining the monthly payment while shortening the term might result in savings of approximately 550,000 yuan. For the equal principal and interest method, savings could reach around 380,000 yuan or 800,000 yuan, respectively, depending on the chosen strategy.Overall, early repayment generally leads to greater interest savings for loans structured under the equal principal method. However, it’s essential to note that there are nuances. For example, if a borrower has been repaying a 30-year loan for five years against someone who has been repaying for 20 years, sticking to the same equal principal and interest calculation might imply that the latter doesn’t need an early repayment strategy since most of the interest has already been covered in the initial years.As mortgage rates reached historical highs, many individuals opted to make early repayments in a bid to mitigate the future burden of elevated rates, only to feel pangs of regret when the PBOC later announced interest rate cuts. A revelation that went unnoticed by some is that adjustments in the Loan Prime Rate (LPR) don't instantaneously reflect on home loan rates.To elaborate, the home loan rate is dictated by the LPR plus a base point (BP) that is typically predetermined and remains static throughout the loan period. The adjustment dynamics of the LPR introduced a significant measure within the financial structure, prompting lenders to realign their mortgage offerings ensuring that borrowers can receive favorable rates.The past years have witnessed two significant surges in early mortgage repayments: first, in 2022, with the continuous adjustment of LPR reducing loan rates, and second, this past April, when the rate of early mortgage prepayments reached historical peaks. The first surge emerged as the perceived value of real estate investments waned, and disparities in interest rates further pushed borrowers toward earlier repayments. The second wave correlates with an apparent scarcity of high-yield assets, compelling individuals to allocate their funds from conventional low-yield instruments towards mortgage repayments as a high-stakes financial strategy.Ultimately, with changing economic conditions, the landscape of mortgage repayment continues to shift, forcing potential and current homeowners to re-evaluate their strategies. As stock markets rebound and confidence surfaces within the real estate sector, the urgency for early loan repayment is waning. However, as one expert articulated, the ongoing fluctuations in the mortgage reference rates mean that whether to repay early or not is a decision weighing on many minds.
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