Find the best option to invest your savings
Those who have savings may be in doubt between investing in a pension plan or amortizing the mortgage loan. Both options have advantages and disadvantages and, depending on the case, it may be more advantageous to choose one alternative or the other.
See the key points that can help you decide between paying off your home loan or investing your savings in a pension plan.
Pension Plans
A pension plan is a type of savings account designed to save money to use during retirement. And, in general, it works in a similar way to most savings plans, that is, holders propose to make periodic contributions to which returns are offered, which increase the total amount of savings for retirement.
According to the Insurance and Pension Funds Supervisory Authority (ASF), a pension plan is a program that defines the conditions for receiving a pension of:
pre-reform;
disability pension;
early retirement;
old-age pension;
survival and/or other comparable contingency, in accordance with legal provisions.
At the time of retirement (or in one of the above situations), the money saved in the pension plans can be withdrawn, together with the return obtained. From this value, taxes must be subtracted when the capital is withdrawn.
Bear in mind that, in most pension plans, savings cannot be withdrawn until retirement without penalty. Therefore, it must be ensured that the capital deposited in a pension plan will not be needed in the short or medium term.
How to amortize the housing loan in advance?
There is also the option of using the savings to amortize the home loan in advance (fully or partially). In this way, families can reduce the debt they owe to the bank and, by owing less capital, they also reduce the interest charges paid on the capital still owed.
The early amortization of mortgage loans can be done in two different ways:
Amortizing capital: we are talking about amortizing capital when we use savings to reduce the money we owe the bank, but without changing the maximum repayment period. In that case, the monthly installment will be reduced, but you will have to continue paying the house loan to the bank until the agreed date.
Amortize time: in this case, savings are used to reduce the time you have to continue paying the loan to the bank. That is, the monthly installments on the house will be the same, but the maximum payment period for the mortgage loan will be shortened (that is, you will pay off the loan faster). Generally, this amortization option requires bank authorization.
On costs associated with early amortization.
Families who have mortgages at a variable rate indexed to Euribor and wish to repay the loan can do so at no cost, thanks to Decree-Law no. it is usually due to banks (in the case of variable rate loans it is 0.5%).
In addition, stamp duty is not charged on the commission in question. In other words, families wishing to repay the mortgage loan will not have to pay 0.5% of the capital they intend to repay by the end of 2023, nor the associated stamp duty.
Those who have fixed-rate housing loans – in which the mortgage payment does not change from the beginning to the end of the contract – still have to pay a 2% amortization commission on the amortized capital, to which stamp duty is added.
Pension plan: advantages and disadvantages
The main advantage of pension plans is that they help you to save extra for retirement. Furthermore, as they are protected and supervised by the Insurance Supervisory Authority and Pension Funds, they are considered safe investments.
But there are also disadvantages. The main one is that, for the most part, it is not possible to withdraw savings from pension plans until retirement time, free of charge. For example, in pension plans, they can be redeemed for the payment of mortgage loan installments, and the tax benefits will have to be returned.
Therefore, the entire amount invested in a pension plan must be capital that will not be needed in the short or medium term to cover other unforeseen expenses. This is because families may face an unexpected unemployment situation, illness or even an increase in house payments due to interest rates and need extra money.
Amortizing home loans: advantages and disadvantages
There are several advantages to amortizing the home loan in advance. You will reduce the level of indebtedness to the bank (this is partially amortized) and, at the same time, you will pay less interest. Of course, reducing debt to the bank always brings more emotional and financial tranquility. If you choose to repay the home loan in time, it means that you will pay off the loan faster and you will be free of financial commitments with the bank sooner.
By reducing the level of indebtedness to the bank, you will also lower the effort rate, which means that it will be easier for you to apply for new loans (housing, personal, car, etc). This is because before the bank, a customer who repays the credit is a good payer and, therefore, will be able to facilitate future credit requests.
But not everything is advantageous.
Families who are paying fixed rate housing loans should do their math well to understand how much it pays to repay the credit, as they will have to pay a commission of 2% on the amortized capital, to which stamp duty is added. For example, a family that is paying off a low interest fixed rate loan, the amount of interest that will be saved with the amortization may not be significant.
Families who have variable rate housing loans are, until the end of 2023, exempt from paying the early amortization fee for housing loans and the respective stamp duty. But from next year onwards, they will also have to do math, taking into account interest savings and the payment of a 0.5% commission (plus stamp duty).
Anyway, in both cases, families must ensure that they don't need the money to meet unexpected expenses. This is because, when amortizing the credit, they will no longer have access to the amortized savings and the benefits can only be felt in the long term.
Investing in pension plans or amortizing mortgage loans: key points to choose from
Is it better to invest the savings in a retirement plan or pay off the mortgage loan?
There is no single answer to this question, as it will depend on the particularities of each case. Still, here are some key points that may help you make a decision:
If the level of bank debt is high, it is best to reduce it whenever possible;
If you have a variable rate home loan and want to be protected from rising interest rates, the best thing is to reduce the debt as quickly as possible;
If you have a fixed-rate, low-interest home loan, it may be more convenient to invest your savings in other more profitable options (such as pension plans);
If you are going to invest your savings in pension plans, you should apply only that amount that you are sure you will not need in the future;
Whether you invest the money in a pension plan or use it to pay off debt early, it's very important that you don't invest all of your savings. That is, you must ensure that you always have a “security cushion” that allows you to have liquidity in case of need.
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Source: Idealist