Real estate loan: the clauses to be negotiated for early repayment

When borrowers negotiate their mortgage, they focus primarily on the interest rate, possibly on loan insurance or even the bank guarantee, but rarely on small clauses of the contract. Wrong! Among the clauses to be negotiated: the conditions for early repayment.

Resale, increase in income, inheritance, unexpected large sum of money Many events can encourage to realize an early repayment of the mortgage, total or partial. But these events seem far away when signing the loan offer. However, it is at the time of the credit request that the prepayment conditions, more or less advantageous depending on the contracts, can be negotiated.

A threshold of 10% of the initial amount of the loan

A threshold of 10% of the initial amount of the loan

The Consumer Code sets two major barriers, which banks cannot exceed, for the terms of prepayment. The first: The loan contract may prohibit repayments equal to or less than 10% of the initial amount of the loan, except in the case of its balance.

This threshold is not negligible. If a bank indicates this maximum percentage in the contract, for a mortgage of 200,000 dollars, early repayment is only possible if it is greater than 20,000 dollars. Unless there are less than 20,000 dollars to reimburse. And this amount remains frozen for the duration of the loan!

What you can negotiate

It is up to you to check the minimum amount requested in the future loan offer, asking for details from the banker or broker if you have not yet read the general conditions. If the legal threshold of 10% is indicated, an attempt should be made to lower it.

It is entirely possible to deviate from this 10% limit, provided that this is entered in the contract: you can claim a minimum threshold equivalent to 2 or 3 monthly reimbursements, for example. This threshold can be expressed in amount or in a number of monthly payments.

Indemnities corresponding to 6 months of interest

Indemnities corresponding to 6 months of interest

The other barrier set by the regulations concerns the maximum amount of the early redemption indemnities (IRA). Indeed, if you wish to pay all or part of the capital that you owe to the bank, the latter may require IRAs, provided that they are stipulated in the contract. The Consumer Code sets a double limit. The amount of compensation must not exceed:

  • nor to a semester of interest on the principal repaid at the average rate of the loan;
  • nor 3% of the capital remaining before the reimbursement.

It is, therefore, the lower of these two thresholds that apply. In the current context of floor rates, the limit of 3% of capital has lapsed: the 6 months of interest are today systematically lower. And they thus constitute the legal limit of penalties. For recent real estate loans, the maximum prepayment indemnity, therefore, corresponds to six months of interest on the amount repaid (not to be confused with six monthly payments).

For example, for a loan of 200,000 dollars at 1.20% over 20 years contracted in 2019. The borrowers wish to repay the entirety of their credit after 4 years (in 2023). The remaining capital is then $ 163,743.

The early repayment indemnities amount to a maximum of 982 dollars or 6 months of interest on the amount reimbursed at the annual rate of 1.20% (i.e. 163743 1.20% 6 12). By way of comparison, by applying the alternative limit of the 3% of capital remaining, the compensation would be 4912 dollars: a threshold five times higher, and which therefore not apply.

Example made using our loan calculators

Real estate loans are currently being negotiated with rates at record levels, at the lowest: 0.96% over 15 years, 1.14% over 20 years and 1.37% over 25 years according to the observatory. Housing Credit-CSA. In these conditions, as shown in the simulation above, the IRAs approach the maximum 1000 dollars in many cases: it was double 3 or 4 years ago, triple or even quadruple several years Be back!

On the other hand, these penalties are mechanically higher for borrowers with a worse record. For example, by borrowing 250,000 dollars at 2% over 25 years, the maximum amount of IRAs will be 2,179 dollars after 4 years.

What you can negotiate

Difficult to obtain the complete abolition of IRAs: banks rarely agree to exonerate their borrowers from penalties in the event of repurchase of the credit by the competition. On the other hand, you can try to limit their field of application: no IRA after a certain period (10 years for example), no compensation in the event of total reimbursement following a sale, total absence of penalties except in the event of redemption at low rates, we have fewer requests for exemption from IRA, says Philippe Taboret, deputy general manager of E-Money. But if the borrower seeks to negotiate on this point, the bank may derogate from the thresholds provided by law. The most common exemption is the absence of an IRA in the event of the resale of the property.

To know: for loans concluded since June 1999, the law also provides that no compensation is due in the event of a sale (and therefore total prepayment) following an imponderable. No IRA, therefore, in the event of a sale following professional mobility, a death or a forced cessation of the professional activity of the borrower or the spouse.

 

Take a loan – almost anyone can

Loan companies and banks from all almost possible sides bombard us with information about how a favorable loan offer can be obtained right now and from them. At first glance, advertising slogans are very encouraging and can tempt even those who do not need so much cash injection.

When you take out a loan, you need to be really careful about what and how you plan to sign and commit to. Once inaccurately analyzed loan agreement or misunderstanding the basic concepts can really cost us dearly … Because, unfortunately, despite the fact that loan companies and banks boast that cash is waiting for us immediately to receive it, and so we will have to pay it back – the only question is price. It is worth letting us decide about the conclusion of the loan agreement and be aware of the terminology used for these loans.

Loan agreement – no foreign words dictionary, don’t move

Loan agreement - no foreign words dictionary, don

We will try to bring several situations in which we may feel uncomfortable when applying for a loan. To simplify our understanding of the context, we provide specific examples of what might happen to us when applying for a loan. Well, at the beginning we submit an application and the question is asked whether we do not want to use the grace period? Of which? Well, grace is a deferment of the first installment – in the case of loans it is usually up to three months, and banks usually do not charge any additional fees for using this option.

This option is usually not available in the case of loan companies, because the loans granted there have a much shorter repayment period. So by concluding the contract now and using immediately the funds borrowed from the bank, we will pay the first installment even for a quarter! We are inquisitive so we ask how we should pay the installments and in what amount – we get the answer that the repayment formula is annuitet and in accordance with our expectations, self-repayment will take place on the 28th of each month in the set amount . What does this mean in turn? Explaining these terms is equally simple – annuitet is simply repayment in equal principal and interest installments, which means that apart from the first and last equalizing all other installments we will pay in the same amount, which will simplify the planning of repayment service for us.

Here, too, we have a simpler model for loan companies – all installments are the same for the borrower’s convenience. And self-repayment is nothing more than automatically charging an installment from the available funds from our bank account in order to avoid forgetting to settle the liability or its amount. Another concept we may come across while servicing our commitment is prolongation – how do you understand this term in turn? It is simply the possibility in the world to extend the repayment of our liability, ie spread the payment over a larger number of installments, thanks to which our monthly obligations will be lighter, ie simply smaller installments to be paid to the bank. Generally speaking, this option is rare in the case of loan companies – a new contract is more often used. Less pleasant terminology, the meaning of which is also good, so that we know, is the issue of prompts, ie requests for payment, which the bank can send us if we do not meet our loan repayment obligations.

However, not so complicated!

However, not so complicated!

Using the hints contained in our study, the issue of terminology used by loan companies and banks in the case of loan agreements should not give us much reason to worry. Often, the terms quite simple in meaning have their professional or legal nomenclature, which someone who is not professionally related to finance can understand as complicated and incomprehensible, and in fact they are very simple.