The repurchase of mortgage
Since the summer of 2016, mortgage rates have reached historically low levels. It is therefore interesting for the holder of such a credit to renegotiate his loan agreement via the procedure of repurchase of mortgage. Here are some points to help you in this process:
- Definition of the repurchase of mortgage
- Real estate renegotiation
- The repurchase of mortgage by a new establishment
- How to know if it is advantageous to carry out such an operation?
1- What is a mortgage repurchase?
- First of all, to find out if you may be interested in a home loan buyout, it is important to understand what this phrase means.
- What is a mortgage?
- According to the code of consumption, a mortgage is intended to finance the acquisition:
- a residential building,
- or a building for professional and residential use,
- or land intended for its construction.
- It may also be intended to pay for repairs, improvements or maintenance of an immovable if the amount of the credit is greater than 75 000 €.
- The purchase must be made by a person, physical or moral, out of his professional activity.
- What is meant by the repurchase of credit, and more specifically by the redemption of real estate loans?
- Beware here of false friends! In general terms, a credit buy-back is a transaction that consolidates multiple loans into one – it is synonymous with credit consolidation or debt restructuring. It can take two forms:
- A consolidation of consumer loans where the establishment buys back consumer credits;
- A group of mortgages, the organization taking over all the loans & debts of the household, including the mortgage. This transaction includes a mortgage on the real estate.
- However, a repurchase of real estate credit is to buy back the mortgage to a financial institution, or renegotiate, in order to take advantage of conditions and / or more advantageous rates . This operation is common since this type of credit is generally subscribed for relatively long periods (on average 20 years) at a rate calculated according to the indicators of the time. Therefore, when rates fall compared to the original rate, it is very interesting to review his contract. The repurchase of mortgage includes two cases:
- It can be done with the lender – there is more talk in this case of credit renegotiation;
- Or, a new institution may buy back the current loan and there will be, among other things, payment of prepayment benefits.
2- The repurchase of mortgage by a renegotiation
- As mentioned above, the repurchase transaction can take place by renegotiating the original loan with the institution that initially granted it . The aim is to obtain better conditions than at the beginning because of a decrease in the amount of the loan repayments and / or a reduction in the repayment term.
- This is materialized by a modification of the contract thus by a simple endorsement . Therefore, the repurchase of real estate credit entails in principle only expenses of rights of file. Concerning the content of the amendment, two cases are to be distinguished:
- If the loan subscribed is fixed rate :
- The rate of a fixed rate credit is calculated according to the simple amount of borrowed capital and the repayment term. The endorsement, materializing the repurchase of mortgage credit, must then include:
- A schedule: It must detail for each maturity the capital remaining due in case of early repayment;
- The global effective rate (TEG) and the cost of the credit: the TEG (or APR for annual percentage rate of charge) corresponds to the interest rate fixed by the credit institution. It makes it possible to obtain the total cost of credit since it includes the nominal rate (basic interest rate), the miscellaneous expenses (the file fees for example) and possibly insurance premiums if a compulsory insurance is subscribed from the lending institution. In case of repurchase of real estate credit, the rider must include the TEG calculated only for the only deadlines and expenses to come.
- If the loan is a variable rate :
- In the case of variable rate credit – also known as the revisable rate – the rate is periodically revised according to the evolution of a benchmark index (often Euribor). The endorsement, materializing the repurchase of mortgage credit, must then include:
- A schedule: As before, it must detail for each maturity the capital remaining due in case of early repayment;
- The overall effective rate (APR) and the cost of the credit: Again, they must be calculated only for the next installments and costs until the date of revision of the rate;
- The conditions and methods of variation of the rate.
3- The redemption of mortgage by the subscription of a new loan
- The repurchase of real estate credit is here to buy back his credit (s) by a new body . A new contract is then drawn up and it is considered as a first loan. Fees are generally expected:
- Early repayment indemnities (IRA) for the original lender: This indemnity must not exceed 6 months of interest on the capital remaining due to the average loan rate and may not exceed 3% of the outstanding capital before the refund.
- Fees related to the opening of the new contract: The repurchase of mortgage is considered as a new loan, the new lending institution may charge a fee.
- In addition, since the repurchase of real estate credit corresponds here to a new loan, it must fulfill all the conditions related to the subscription of a credit. As such, the lender must check the creditworthiness of the borrower by asking for evidence of his situation. He has a free appreciation of the situation and has no obligation to grant a new loan.
- In the case of repurchase of mortgage, the new establishment can also impose a new insurance. Although it is not mandatory, it is in practice for the risks related to death and disability. Since the Lagarde law of 2010, the borrower is not obliged to subscribe to the insurance offered by the lender: he can choose an equivalent insurance from the organization of his choice.
- The new lender can also, as part of a mortgage repurchase, ask for a guarantee guarantee bank or even a mortgage.
4- How to determine if it is interesting for me to proceed with a mortgage repurchase?
- The repurchase of mortgage is widely recommended at this time because the rate granted for mortgages is half the size of 2013. Today, the average rate is 1.57% for a repayment period of 20 years.
- In order to know if there is interest in buying back mortgages, three criteria must be assessed:
- The rate differential : The current rate must be at least one percentage point lower than the original home mortgage rate (for example, an initial rate of 2.8% and a current rate of 1.8%). In some cases, a difference of 0.5 points may justify a redemption.
- The amount of capital remaining due : The repurchase of mortgage for a small sum (for example a few tens of thousands of euros) has no interest. It is advisable to have a capital remaining due to a fairly high amount, in view of the costs incurred by the operation.
- The remaining repayment term : For the redemption to be advantageous, it is better to be in the first half of the credit since it is at the beginning that the interests are the most important. It is therefore at the beginning of the loan that we must think about the renegotiation.
- As with any credit application, it is important to compete with simulations from different organizations. Most of the time, simulators exist online and all this is free. It is at this stage that you need to consider whether it is better to renegotiate the contract with the original lender or whether it is better to redeem real estate loans with another organization. However, be careful to compare offers based on the APR, the only rate accounting for the actual cost of the loan.
- The repurchase transaction of real estate credit remains, at the beginning of September 2016, rather advantageous. For example, with a loan of 250,000 euros subscribed over 20 years less than 5 years ago, we can expect tens of thousands of euros in savings. To be sure, simply compare the starting schedule with the new schedule on the remaining time. Never forget, during your assessment, the costs that may be incurred by the repurchase of mortgage: the possible indemnities of prepayment and expenses of file, but also, in certain cases, the expenses of transfers of guarantee. These apply in case of bank guarantee, or mortgage, initially given as collateral. It is common, in case of buyout by a new organization, that the original lender transfers them to the new one. The fees may then be minimal, but sometimes correspond to 2% of the outstanding capital.