The repurchase of mortgage
Since the summer of 2016, mortgage rates have reached historically low values. It is then interesting for the holder of such a loan to renegotiate his loan contract via the mortgage repurchase procedure. Here are some points to best help you in this process:
- Definition of mortgage repurchase
- Renegotiation of mortgage
- The repurchase of mortgage by a new establishment
- How do you know if it is advantageous to perform such an operation?
1- What is a mortgage repurchase?
First of all, to know if you can be interested in a mortgage repurchase, it is important to understand what this expression means.
- What is a mortgage?
According to the Consumer Code, a mortgage is intended to finance the acquisition:
- a building for residential use,
- or a building for professional and residential use,
- or land intended for its construction.
It may also aim to pay for repairs, improvement or maintenance of a building if the amount of the loan is greater than € 75,000. The purchase must be made by a person, natural or legal, outside his professional activity.
- What do we mean by repurchase of credit, and more particularly by repurchase of mortgage?
Watch out for false friends here! In general, a credit buyback is an operation that allows several loans to be grouped into one - it is then synonymous with credit consolidation or debt restructuring. It can take two forms:
- A group of consumer loans where the establishment buys back consumer loans;
- A group of mortgage loans, the organization taking over all household loans & debts, including mortgage loans. This transaction includes a mortgage on the property.
However, a mortgage repurchase consists of buying back the mortgage from a financial institution, or renegotiating it, in order to take advantage of more advantageous conditions and / or rates . This operation is common since this type of credit is generally taken out for relatively long periods (on average 20 years) at a rate calculated according to the indicators of the time. Therefore, when the rates fall compared to the original rate, it is very interesting to review your contract. The repurchase of mortgage brings together two cases:
- It can be done with the lender - we talk more in this case of credit renegotiation;
- Or, a new institution can buy back the current loan and there will be, among other things, the payment of prepayment indemnities.
The costs are not the same depending on the situation
2- The repurchase of mortgage by renegotiation
As we have seen previously, the mortgage repurchase operation can be carried out by renegotiating the original loan with the establishment that initially granted it . The goal is to obtain better conditions than at the outset due to a decrease in the amount of monthly loan payments to be repaid and / or a reduction in the repayment period.
This is materialized by a modification of the contract, therefore by a simple amendment . Therefore, the repurchase of real estate credit in principle only entails administrative fees. Regarding the content of the amendment, two cases should be distinguished:
- If the loan taken out is at a fixed rate :
The rate of a fixed-rate loan is calculated based on the simple amount of capital borrowed and the repayment period. The rider, materializing the repurchase of mortgage, must then include:
- A schedule: It must detail for each due date the capital remaining due in the event of early repayment;
- The overall effective rate (TEG) and the cost of credit: The TEG (or APR for annual percentage rate) corresponds to the interest rate set by the credit institution. It allows to obtain the total cost of the credit since it includes the nominal rate (base interest rate), the various costs (the administration fees for example) and possibly insurance premiums if compulsory insurance is taken out. from the lending institution. In the event of mortgage repurchase, the rider must include the TEG calculated only for the only installments and costs to come.
- If the loan taken out is at a variable rate :
In the case of variable rate credit - also called revisable rate, the rate is revised periodically according to the evolution of a benchmark index (often the Euribor). The rider, materializing the repurchase of mortgage, must then include:
- A schedule: As before, it must detail for each due date the capital remaining due in the event of early repayment;
- The overall effective rate (TEG) and the cost of credit: Here again, they should only be calculated for the only maturities and costs to come up to the date of the rate revision;
- The terms and conditions of the rate variation.
3- The repurchase of mortgage loan by the subscription of a new loan
The real estate loan repurchase operation corresponds here to having his loan (s) redeemed by a new organization . A new contract is then drawn up and it is considered to be a first loan. Costs are generally expected:
- Prepayment indemnities (IRA) for the benefit of the original lender: This indemnity must not exceed 6 months of interest on the principal remaining due at the average rate of the loan and it cannot be greater than 3% of the principal remaining due before reimbursement.
- Application fees linked to the opening of the new contract: The mortgage repurchase is considered as a new loan, the new lending institution may charge application fees.
In addition, since the repurchase of mortgage corresponds here to a new loan, it must meet all the conditions related to the subscription of a credit. As such, the lender must check the creditworthiness of the borrower by asking him for supporting documents on his situation. He has a free assessment of the situation and has no obligation to grant a new loan.
In the event of mortgage repurchase, the new establishment may also impose a new insurance. Although it is not compulsory, it is in practice for 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, in the context of a mortgage repurchase, ask for a bank guarantee, or even a mortgage.
4- How to determine if it is interesting for me to proceed to a mortgage repurchase?
The repurchase of mortgage loan is widely recommended at the moment because the rate granted for the mortgage loans is two times lower than in 2013. Today, the observed average rate is 1.57% for a repayment period of 20 years.
In order to know if there is an interest in buying a mortgage, you have to assess three criteria:
- The rate differential : The current rate must be at least one point lower than the original 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 point may justify a buyback.
- The amount of capital remaining due : The repurchase of mortgage for a small sum (for example a few tens of thousands of US dollars) has no interest. It is advisable to have a capital remaining due in a fairly high amount, this in view of the costs generated by the operation.
- The remaining repayment period : For the repurchase to be advantageous, it is better to be in the first half of the credit since it is initially that the interest is the most important. It is therefore at the start of the loan that you have to think about renegotiation.
As in the case of any credit application, it is important to play competition by performing simulations with different organizations. Most of the time, simulators exist online and all of this is free. It is at this stage that you must study whether it is better to renegotiate the contract with the original lender or if it is better to proceed with a real mortgage repurchase with another organization. Be careful, however, to compare the offers according to the APR, the only rate reflecting the real cost of the loan.
The real estate loan repurchase operation remains, at the start of September 2016, rather advantageous. For example, with a loan of 250,000 US dollars taken out over 20 years less than 5 years ago, we can hope for tens of thousands of US dollars in savings. To be sure, it suffices to compare the starting schedule with the new schedule over the remaining term. Never forget, during your evaluation, the costs likely to be generated by the repurchase of mortgage loan: any early repayment indemnities and handling fees, but also, in some cases, the costs of guarantee transfers. These apply in the event of a bank guarantee or mortgage, initially given as a guarantee. It is common, in the event of a takeover by a new body, for the original lender to transfer them to the new one. The costs can then be minimal, but sometimes correspond to 2% of the outstanding capital.