When interest rates are trending downward, borrowers are quick to “renegotiate” their current loans, while others take advantage of it to “buy back” theirs from a competing institution. Redemption or renegotiation… these two terms are sometimes used indiscriminately despite the fact that they refer to two very different financial transactions, as we will see.
A nuance of specialists…
With the historic drop in real estate rates in recent years, now is a good time to renegotiate your loan with the bank that granted it, or have it repurchased by another institution. In both cases, this should allow you to benefit from more advantageous financing conditions.
Renegotiation consists in convincing your banker to revise the current conditions of your contract, and in particular to obtain a reorganization of the interest rate, in order to leave on a new cheaper loan. However, as this operation forces the lender to cut corners, since he paid the most expensive credit on the conditions of the interbank market of the time, the latter risks being much less accommodating. And unless you are a very large customer, it is not always easy to attract good graces from your bank.
If you have an excellent profile, there is no reason to deprive yourself of it. The process is relatively simple. In principle, the modifications are noted by means of an amendment to the initial loan contract.
On the other hand, for “average” borrowers, they are less likely to achieve their ends. And even if the bank accepts their request, the reduction granted is generally limited, and the formalities rather restrictive.
In case of bank refusal, renegotiation via broker remains. Have you thought about it?
If, again, the new rate offered does not suit you, you have two other options: the repurchase of your home loan by another establishment and the total repurchase of all your credits (real estate + your other consumer loans).
- The repurchase of your mortgage by another establishment allows you to make savings on the total cost of the credit and possibly decrease the duration of your new credit.
- However, the overall redemption of your debt has another objective: to reduce your monthly payments and therefore reduce your debt ratio. In the latter case, it is a question of asking a competing establishment to “buy back” all of your outstanding loans, including your mortgage. All your debts will be grouped into a single credit, with a single monthly payment.
The benefits are manifold. The monthly repayment of your loans will be reduced, and your debt ratio brought below 33% of your income, the operation will “resolve you”. Likewise, buying back credit improves your savings capacity and allows you to return to a more balanced financial situation.
… But also a difference from a financial point of view
However, the repurchase of mortgage is generally more expensive. Indeed, it entails the payment of costs, including early redemption indemnities (IRA), the amount of which corresponds to 6 months of interest calculated on the reimbursed amount, but which nevertheless remains capped at 3% of the remaining capital of.
The borrower will also have to pay the “administrative fees”, which constitute the remuneration of the lender granting the buy-back. New warranty costs are also expected.
Depending on the case, you will be asked to pay the costs of providing a guarantee, lifting the previous mortgage or renewing the deposit with the guarantee fund. Also, the extension of the repayment period risks increasing the total cost of the credit.
Difficult to estimate the amount like this, the simplest is to make a simulation of buy back of credits, or even an online request. Thus, you will receive a costed and detailed proposal, at this stage, without obligation.
The renegotiation, for its part, gives rise only to the payment of the application fees, intended to cover the cost of the amendment. Again, it is possible to reduce the note, since they are easily negotiable with the lender. Concretely, the amount of fees depends on your profile as well as your negotiating power. In any event, contrary to what is often heard, renegotiation does not entail prepayment fees or even warranty fees.
What strategies to carry out its buyout or renegotiation?
Borrowers for whom the reduction of the total cost constitutes the only motivation will lead an “aggressive” strategy and will not hesitate to play the competition in order to obtain the most attractive offer, whether it comes from their bank or from another establishment. However, depending on the relationship you have with your banker and your strength of proposal, you can exclusively favor one or the other option, with a slightly different approach.
Your bank, you are well there, you appreciate the services offered and do not want to change it? So you have to be smart!
Do not hesitate to put pressure on your banker and bring two or three competing offers during the meeting. Make him understand that you are not married to him, and that after all, changing banks does not scare you if it is to earn several hundred or thousands of euros! Even if you have no intention of changing, pretending it will raise the stakes in the negotiations. In any case, whatever the outcome of the interview, you will come out a winner.
In the event that you no longer enjoy yourself in your current establishment and that a departure is looming despite a particularly advantageous property rate, then you have nothing to lose. Be convincing!
If your goal is to immediately reduce the monthly payments on your loans (and not its total cost), then opt for redemption. There are several possibilities:
- Either you take the time to canvass several banks and carefully study each proposal;
- or you can simply use a mortgage loan broker. It is then he who will be responsible, on your behalf, for finding the offer that meets your requirements.
Renegotiation or buyout: what to choose?
In both cases, you will need to provide documents to the establishment you have chosen. The objectives are ultimately quite different from one operation to another.
Credit repurchase is:
- 1 the advisability of paying less each month: immediate reduction in monthly repayment;
- 2 the opportunity to simplify its budget management: regrouping all old loans into a single line of credit to be paid each month;
- 3 the possibility of regaining savings capacity: linked to the reduction in monthly payments;
- 4 a new lease of life for making projects: during the buyout, an additional sum of money can be included in the credit for the financing of a project (work, marriage);
- 5 an operation necessary to anticipate the future: during retirement, for example, paying less each month can be essential on a daily basis.
Of course, a repurchase of all your credits involves the increase of the total cost of the credit.
While renegotiation allows:
- 1 reduction in the overall cost of credit;
- 2 the revision of his loan at a lower rate.
However, in practice, everything does not seem so simple. In general, a courted client will have to choose between a very advantageous buyout offer and a new loan from their initial establishment, less competitive than that proposed by the competitor, of course, but much better than their current rate.
Customers with a more modest profile will have to choose a sometimes higher rate in return for taking a risk from the new financial institution but which will be committed over a longer period and therefore lower monthly payments.
So, loan repurchase or credit renegotiation, how to choose?
The customer’s choice will therefore depend on his objectives – to reduce his monthly payments or to reduce the total cost of the loan – and on the additional financial effort which he is ready to provide in order to save sometimes thousands of euros over ten or fifteen years, or on the contrary of his wish to decrease his monthly payments to find a healthier management of his budget.