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
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
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.