Pay off the mortgage, is it worth it?

Pay off the mortgage

Due to the high fees charged, it is very common for Brazilians to choose  to take out a mortgage   to anticipate the purchase of their own home. However, when there is good financial planning and, perhaps, the possibility of capital accumulation, a question arises as to what is best to do: invest this extra resource or use it to pay off real estate financing?

As with most questions, the most correct answer to this question is: it depends. Each case must be analyzed in a unique way to be able to find the best solution, which will provide greater financial gains.

Continue reading this article and find out what you need to evaluate to decide between reducing your debt or applying your savings. Good reading!

Calculate the cost of financing

The first step in finding the best solution to this issue is to better understand the costs of your debt. For this, it will be necessary to calculate the Total Effective Cost (CET) of the contracted financing.

Many people do not know, but the costs of a loan go beyond the interest rate. There are other fees that are charged by financial institutions, which serve to defray the administration of the account and pay the insurance rate of the contracted financing. It is also necessary to pay attention to the correction of the financing, which is usually calculated by the Reference Rate (TR).

Thus, when calculating all charges and expenses that are incurred in a credit operation, the value of the CET is found.

To understand this question, imagine the following situation: suppose you have financed your property with an annual rate of 9.75% per year. To find the CET, it will be necessary to add the interest rate contracted to the TR (which in 2017 was 0.60%), the administrative rate of the financial (which in our example will be 0.3% pa) and the insurance, which adds an annual tariff of 0.07%.

Adding all these costs, the financing CET was 10.72% per year.

In conclusion: when choosing financing or a loan, the customer cannot  compare interest rates   or the value of the installment. In fact, he needs to confront CET with CET.

By law, this value must be included in advertising materials for banks, construction companies, etc. The problem is that it appears in the background. The highlight is always the interest rate. This is common in car advertisements, for example, which speak of “zero rate” or “exemption in the first installment”.

Determine the return of applications

The second point to be identified is the potential return that the applications may bring. For this, it is essential to know that the calculation should consider future earnings projections, and it is not allowed to evaluate past performance.

If the resource is invested in variable income – such as real estate funds or stock market shares – there will be great difficulties in making this calculation. However, the most common is that Brazilians invest a large part of their assets in fixed income.

Thus, there is a viability to estimate how much return this investment will bring. The most important thing in this step is to calculate, as accurately as possible, how much profit will be obtained.

Therefore, it is necessary to conclude the net profitability of the investment, since in this way, the effective profit of this investment is determined, discounting what will be paid in  income tax (IR)   on the income.

Imagine that, in the same hypothetical situation as before, you have the necessary capital to pay off the outstanding balance of your real estate financing, and you have found a CDB that yields an annual rate of 13%. It is assumed that there is a desire to maintain this investment for 3 years. In that case, a 15% IR tax will be charged on the income. Therefore, from simulations, it was found that this CDB will have an annual net return of 11.24%.

Evaluate each option

By having in hand the Total Effective Cost of the contracted loan and the annual net return on an investment, you will have the necessary conditions to make an analysis and determine the feasibility of paying off the real estate financing.

If the return on the investment is higher than the financing CET, there is a positive leverage, and it is recommended to maintain the loan. However, if the effective cost is greater than the profitability of the investment, it may be that the best option is to settle the debt.

To exemplify, consider the hypothetical situation already mentioned. It was established that the CET of the financing is 10.72% per year, while the CDB’s annual net return, for a period of 3 years, will be 11.24%. In this case, due to the fact that there is positive leverage, it can be concluded that the most advantageous will be the maintenance of the debt.

However, in times of a reduction in the basic interest rate of the Brazilian economy, many investments in fixed income have lost their attractiveness. Having said that, it is normal to find a Total Effective Cost of the loan higher than the income generated by the applications.

Use FGTS to settle real estate financing

The Severance Indemnity Fund (FGTS) is a labor law whose main objective is to protect workers if they are dismissed without just cause. Therefore, there are several limitations to be able to use it, and one of the possible uses is to assist in the acquisition of a property.

Every month, without salary discounts, the employer deposits in an account linked to the contractor 8% of the value of his salary. The amount invested in this account earns annual interest of 3% and, due to its mandatory nature, FGTS can be considered as compulsory savings.

Because of the low annual net profitability, when the possibility exists, it is a great option to use FGTS to pay off real estate financing. That way, you will be able to make use of money that would stand still for a long time without providing you with big returns.

You can use this amount to pay late installments (up to 12 installments) or advance them and get a discount of up to 80% on that payment. However, this use may be limited to an official calendar imposed by Caixa Econômica Federal.

Therefore, contact the bank to understand the current deadlines.

Request advance payment discount

Suppose you had access to unexpected money, an inheritance, for example. Would it be a good idea to use it to pay off real estate financing? It depends on how interest accrues on the debt.

The Consumer Protection Code (CDC) guarantees the right to a  proportional discount on interest in advance payment.  However, the installments of a loan are composed of interest + debt. That is, if the owner still has to take 10 installments of R $ 1,000, in which only R $ 200 per month is interest, the discount will be calculated on this amount (R $ 2,000) and not on the entire debt (R $ 10 thousand).

Knowing this, it might be more interesting for the character in our example to invest his money. Thus, he could preserve his purchasing power and use the investment income to pay for one or another installment of his financing.

Sell ​​a financed property

As the term of the financing is usually long, it is possible that the property acquired will no longer meet the needs of the owner, when  it became small,   the location makes its routine difficult, the resident needs to move to work etc.

In addition, this is an alternative to pay off real estate financing, if the owner is going through a delicate financial situation.

Within the sale price of the property, the seller must consider how much he still owes from the financing, the amount he invested and the current market price of the property.

In case the sale is made in cash, it will be up to the seller to pay off his debt with the bank, using part of the capital he received for the sale. For that, he must look for the financial institution in which he made the financing, communicate the intention to pay off the debt and pay the bank slip that will be issued by the company.  Attention  : know this value before putting your property up for sale.

If the buyer takes out another loan to make the purchase, the loan will pay off the old one and only the most recent loan, on behalf of the new owner, will exist.

For this, the current owner must go to the bank and signal the intention of the sale. The company will calculate the value of the debt and create a purchase and sale contract that must be signed by the seller, the buyer and the bank used in the new financing.

After this commitment has been signed, the transaction may be finalized, releasing the former owner from the financing obligations.

Consider the best option

However, paying off real estate financing is not always the best option in the case of negative leverage, because if it is necessary to use all your money to settle the outstanding balance, the fact that you no longer have an emergency reserve can be something quite risky.

Financial experts recommend that you keep at least 6 months of your fixed monthly expenses in a conservative investment profile and that you have great liquidity. This emergency fund is essential for good financial planning, as it can be used in the event of an unforeseen event, such as a layoff or an unexpected high expense.


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