Loan overpayment

Overpaying is an investment - just a certain one

When you overpay a loan, you don't "lose" money. You are buying yourself interest you won't pay. Since the bank charges 7.5% a year on your balance, every zloty taken off that balance saves you exactly 7.5% a year - for the whole remaining term of the loan.

It is an investment with a rate of return equal to the loan's interest rate. It has three features that no investment product on the market has:

• The return is guaranteed. Not "historical", not "projected". It follows from an agreement you have already signed.
• The risk is zero. Interest you haven't paid cannot lose value.
• The tax office takes nothing. You don't pay Belka tax on a cost you have avoided - because it is not income.

Overpaying vs a savings deposit: numbers, not opinions

This is the point where most conversations about "it's better to invest than to overpay" end. A deposit pays gross - and the tax office takes 19% Belka tax from the gain. Overpaying pays net straight away.

But before you overpay - check three things

We tell the truth even when it is inconvenient for our own argument:

• Your financial cushion comes first. An overpayment can't be undone. Money paid to the bank stops being yours - if you lose your job in six months, the bank won't give it back because "you were overpaying, after all". First 3-6 months of expenses in your account, only then overpayment.
• More expensive debt comes before cheaper debt. A credit card at 18% or a payday loan beats a mortgage at 7.5% hands down. Pay off the most expensive first.
• Check that you won't lose a relief. If your loan is covered by a state subsidy, or you use an IKZE account and your deduction limit would be lost - work that out separately.

Shorten the term or lower the instalment? They are not the same

You overpay - and the bank asks what to do with it. You have two options and the difference runs into tens of thousands of zloty. Example: PLN 300,000, 7.5%, 20 years, overpaying PLN 500 a month.

Shortening the term leaves the instalment unchanged, so every zloty you overpay fully cuts interest from the tail end of the loan. It is the mathematically better option - and clearly so.

Lowering the instalment gives you a bit of breathing room every month, but as a result you repay the capital more slowly - so interest is charged for longer and on a higher balance. You are buying comfort with real money.

Timing: overpay early

Interest is charged on the current balance. A zloty overpaid in the first year works for you for all the remaining years of the loan. The same zloty overpaid three years before the end - for three years.

The same amount, the same loan, a different moment. That is why a bonus or a 13th-month salary is worth putting into the loan straight away, not "some time, when I get round to it".

Your right to early repayment

The bank cannot forbid you to overpay or repay early - it is a statutory right. It may, however, within strictly defined limits, charge compensation:

• Variable-rate mortgage: compensation is allowed only during the first 36 months, at most 3% of the amount repaid and no more than the interest you would have paid over a year (Art. 40 of the Polish Mortgage Credit Act). After three years - zero.
• Fixed-rate mortgage: here the bank has more freedom and may stipulate compensation later too. Check your agreement.
• Consumer (cash) loan: compensation of at most 1% of the amount repaid, and if less than a year is left - 0.5%. And only with a fixed interest rate.

How to do it in practice

1. Ask your bank for a statement of current debt - you need the capital amount, not the sum of the remaining instalments.
2. Submit an overpayment instruction and state explicitly: "shorten the loan term".
3. Transfer the money - ideally just after the instalment date, so the whole amount goes straight to capital and not to accrued interest.
4. Once it is booked, check the new schedule. If the bank lowered the instalment instead of shortening the term - complain.
5. Repeat. Even PLN 200 a month makes a difference over the years that you can see in this calculator.

Want to see the other side of the same mechanism - how compound interest works for you rather than against you? Work it out in the compound interest calculator. And if you are only just taking out a loan, start with the loan repayment calculator.

Overpay the loan or save in a deposit?

Overpay - as long as the loan costs more than the deposit returns after tax. A deposit at 5% gross gives 4.05% net after Belka tax. Overpaying a loan at 7.5% gives 7.5% net, because the tax office doesn't tax a cost you avoided. For a deposit to break even with such a loan, it would have to pay 9.26% gross.

Shorten the term or lower the instalment?

Shorten - if you can handle your current instalment. With PLN 300,000 at 7.5% over 20 years and an overpayment of PLN 500 a month, shortening the term saves PLN 98,050.36 in interest and ends the loan 6 years and 2 months early. Lowering the instalment saves only PLN 52,434.90. The difference is over PLN 45,000 just for ticking a different option on the form.

Can the bank charge a fee for overpaying?

The bank can't take away your right to early repayment - it is statutory. On a variable-rate mortgage, compensation is only possible during the first 36 months (max. 3% of the amount repaid and no more than one year's interest). After that you overpay for free. On a cash loan the limit is 1% (0.5% when less than a year is left).

Will the bank refund my fee if I repay the loan early?

For a consumer loan, yes - this was settled by CJEU ruling C-383/18 "Lexitor". The fee is refundable in proportion to the shortened period. With a mortgage the matter is disputed (CJEU ruling C-555/21) and banks defend themselves successfully - don't factor it into your calculations in advance.

When does overpaying have the biggest effect?

At the very beginning. Interest is calculated on the balance, so a zloty overpaid in the first year cuts interest for all the following years. The same zloty overpaid near the end of the loan saves more than ten times less. Don't wait for "a better moment" - there won't be one.

Does overpaying damage my credit history in BIK?

No. Repaying on time - including early - is a positive event in BIK (Poland's credit bureau). The myth about "damaging your score" comes from the fact that the bank loses money on you, not from how BIK works.