When it comes to borrowing on a mortgage, borrowers often focus on the rate and insurance, without thinking of negotiating some other clauses of the contract. However, to be able to afford the possibility of making early repayments in good conditions, you have to look at it from the start. Explanations.
Resale, income increase, inheritance, punctual perception of a large sum of money, etc. Many events can make it possible to realize an early repayment of real estate credit, total or partial. But these events seem far away when signing the contract. However, it is at the time of the loan application that can be negotiated the conditions of early repayment, more or less advantageous depending on the contract.
A threshold of 10% of the initial amount of the loan
The Consumer Code sets two main barriers, which banks can not exceed, for early repayment terms. First of them: "The loan agreement may prohibit repayments equal to or less than 10% of the initial loan amount, except for its balance. "
This threshold is not negligible. If a bank indicates this maximum percentage in the contract, for a mortgage loan of 200,000 euros, an early repayment is possible only if it is greater than 20,000 euros. And this amount remains frozen for the duration of the loan, except to repay the full amount.
Compensation corresponding to 6 months of interest
The other barrier set by the regulations concerns the maximum amount of prepayment penalties. Indeed, if you want to pay all or part of the capital you owe the bank, the latter may require an early repayment compensation (IRA), provided that the IRA have been stipulated in the contract. The Consumer Code sets a double limit. The amount of compensation must not exceed:
- nor "one semester of interest on capital repaid at the average loan rate";
- nor "3% of the principal remaining due before the repayment".
In the current context of low rates, the second limit is no longer active. If, in the past, it was customary to say that IRAs represented 3% of the total prepayment, this logic is now obsolete. For recent real estate loans, the maximum prepayment allowance is therefore six months interest on the amount reimbursed (not to be confused with six monthly installments).
Example, for a loan of 200,000 euros at 2.20% over 20 years. The borrowers want to repay all their credit after 4 years. The remaining capital is then 166,708 euros.
The prepayment indemnities amount to a maximum of 1,834 euros, ie 6 months of interest on the amount reimbursed at an annual rate of 2.20% (ie approximately 166,708 × 2.20% × 6 ÷ 12).
Prohibition of IRA in certain cases
Again: ARIs are not mandatory. Moreover some institutions use the absence of penalties as a sales argument, like Boursorama Banque, which however specifies in its conditions: "except in case of repurchase of loan by the competition".
The law also provides that, for loans entered into since June 1999, no compensation is payable in the event of a sale (and thus a total prepayment) following an imponderable: professional mobility of the borrower or the spouse, death or forced cessation of their professional activity.
Two levers of negotiation
If it proves difficult to obtain the complete elimination of IRAs, especially since they represent sums increasingly low because of low rates, the borrower can try to limit their scope: no IRA after a certain period (10 years for example), no compensation in the event of a total refund following a sale, total absence of penalties except in case of repurchase of the credit by the competition, etc.
The other bargaining lever is the minimum amount of partial repayments. It should be checked that the minimum amount requested, which can be expressed in amount or number of monthly payments, is compatible with your needs. If the legal 10% threshold is indicated, try to lower it. This negotiation must be held with the bank advisor, or via a broker, at the time of the simulations, or even once the loan offer has been received, and preferably before the definitive signature.
© cbanque.com / BL - Frédéric VERGNE - Marie de BEAUDRAP / June 2015