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Home loan repurchase: how to profit?

The interest rates granted to new mortgage loans are flirting with historically low levels, with an average of 1.80% for a loan over twenty years in 2018. Since the promise to sell their property and the signing of their loan there At 5 or 10 years, the loan conditions practiced by the credit organizations have become more flexible. As a result, households which chose to go into debt at a rate sometimes much higher a few years ago can legitimately feel aggrieved!

However, it is still possible for these owners to take advantage of the favorable economic situation by having their credit bought back by a competing bank, with reduced monthly payments or a shorter credit. Be careful: the transaction involves certain costs, which explains why it is not systematically profitable for the borrower. Successful repurchase of mortgage: instructions for use!

Home loan buy-back: what is it?

The repurchase of real estate loan supposes, for the borrower, to find a competing bank (bank B) which agrees to reimburse the entirety of the credit initially subscribed with bank A. The borrower does not have any more whereas take out a new loan from bank B, which will normally be subject to more favorable conditions, and in particular a lower interest rate.

Why buy a mortgage?

This operation has advantages both for the borrower, who will pay less interest in the long term and can therefore make significant savings, and for his new bank, which sees in this repurchase of credit the best means of capturing and retain new customers. The original bank, on the other hand, is not totally losing since it recovers early redemption fees which partially compensate for its shortfall.

How to buy a mortgage?

A procedure for buying back credit is simple to implement. It involves making an appointment with several competing banking establishments to communicate to them the details of the credit (duration, amount, outstanding capital, possible new contribution, etc.), or more simply to call on a mortgage broker. Provided with a comparison of the best credit buy-back offers from these different banks, you can also try to renegotiate your credit directly with your current bank.

What are the costs of buying a mortgage?

Do you want to redeem your mortgage? Be careful, a new interest rate lower than that of your current credit does not necessarily mean savings. Indeed, additional costs are added and can greatly reduce the profitability of the operation, or even, ultimately, make the repurchase of credit more expensive than by keeping the initial loan!

What are the bank charges?

In the context of a loan buy-back, there are numerous penalties and fees which can significantly affect the profitability of the operation:

  • The prepayment indemnities (IRA) represent, most of the time, the most important burden for the borrower in the event of redemption. In fact, the bank that granted the initial credit has no interest in negotiating with a client that it loses anyway, and will therefore claim all of these penalties. They amount either to the equivalent of six months of interest on the amount of the principal repaid, or to 3% of the principal remaining due, the lowest amount being retained. The repurchase of a 4% loan with outstanding capital of $ 100,000, for example, will generate IRAs in the amount of $ 2,000 (100,000 x 4% x 6/12). Only possibility of exemption: if a particular clause was negotiated during the establishment of the credit, which is a rather rare case.
  • The end of the previous loan and the taking out of a new loan involve new guarantee costs. These will take the form of release costs (in the case of a mortgage or a Privilege Registration of Money Lenders) or of a new deposit to be paid (if you have called on a guarantee fund). In the latter case, the possible reimbursement of the previous deposit may, however, largely offset these costs.
  • Your new bank may well charge you administration fees, which are supposed to compensate for the work done for this operation. Just like when taking out your first home loan, they can often be negotiated.

The borrower insurance, finally, will have to be changed if you had taken out it with your initial bank (group contract) or to update if you had chosen the delegation of insurance. In both cases, the premium should decrease, since the interest rate on the credit is lower, unless of course if a significant new risk has since appeared (illness, partial disability, etc.).

Reduce your monthly loan payments!

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The costs of notary for a repurchase of mortgage

When buying a home loan, notary fees can be claimed. Thus, in the context of a credit guaranteed by a mortgage or by a lien of the money lender, the borrower must pay the notary fees. Two cases exist:

  • the original loan was secured by a mortgage guarantee. It is then generally necessary to request the release of the first mortgage guarantee. This operation generates costs in addition to taking the new guarantee.
  • The old mortgage was guaranteed by a guarantee organization. In this case, the borrowers will only have to pay the notary fees for the new guarantee.

When can you buy a home loan?

It is possible to submit a mortgage loan redemption request at any time of the loan. In addition, a loan that has already been bought back can be bought again, as many times as desired. However, a certain number of criteria must be met to be certain that the repurchase of mortgage will be profitable:

  • if the outstanding capital of the mortgage loan exceeds $ 70,000;
  • if the new nominal interest rate is 0.70% to 1% lower than the previous rate;
  • if the loan repayment phase is still in its first half.

How to simulate a home loan repurchase?

To get a first estimate of the savings that it is possible to achieve thanks to a credit buyout, it is possible to use credit simulators directly on the internet. To have the main elements, take your home loan contract and the amortization table.

Here is an example of calculation:

A mortgage for a total amount of $ 230,000 was taken out on May 12, 2014 over twenty years, for an interest rate excluding insurance of 4.5%. The monthly payment is $ 1,455.09.

As of January 12, 2017, the remaining capital due was $ 209,892. The borrower finds a competing bank which accepts to repurchase its credit and to propose a new loan to him at a rate of 2,5%. He opts for a reduction in the monthly payment, which only amounts to $ 1,272.51 for the remaining 208 months. After charging the prepayment penalties of the loan, which amount to $ 4,722, and the new guarantee of $ 1,000, the total savings for the borrower amount to $ 36,976, or a considerable sum.

Note that if the credit had been granted on May 12, 2011 and under the same conditions, the gain would be “only” $ 24,985, and less than $ 15,000 for a loan contracted in 2008. Suffice to say that a mortgage should be bought as soon as possible!

What is the mortgage repurchase rate in 2019?

For several years now, interest rates have been kept at very low levels. This pushes many homeowners to redeem their mortgage. Thus, in 2019, it is possible to obtain rates that can range from 0.80% to 1.70% for a credit repurchase.

The amount of the loan, the duration, the quality of the borrower and the counterparties granted are the 4 main criteria that allow a bank to determine the rate of a repurchase of a mortgage. Remember: having several proposals allows you to be in a strong position to start a negotiation.

Which bank should you choose for your credit repurchase?

All banks offer to buy home loans from individuals. It is indeed a great way for them to develop their clientele!

Purchase of mortgage by own bank

In reality, a mortgage loan buyout by your current bank is called a renegotiation. This consists in asking his bank to lower the interest rate applied to the credit.

Substantial advantage of renegotiation: the borrower does not need to pay the prepayment indemnities, which constitutes a certain saving. However, the interest rate applied is generally higher than when requesting a buyout from another establishment.

It is therefore necessary to compare the overall cost of credit to determine the most attractive proposition. In addition, coming to see your bank advisor with competing offers increases your chances of obtaining a renegotiation.

Purchase of mortgage by another bank

Easier to obtain than a renegotiation, the repurchase of mortgage by another banking establishment knew a great success during the last years. Here, the borrower has the choice between presenting his file himself to several banks or seeking the services of an intermediary: the broker.

Note: the costs of a mortgage repurchase are higher than during a renegotiation. Indeed, the early redemption indemnities must be paid to the initial bank.

How to know if the repurchase of mortgage is profitable?

It is especially in the very first years of mortgage, when the principal owed is the largest, that the share of interest in monthly payments is significant. There follows a logical and unstoppable consequence: the older your mortgage is, the less the repurchase of credit will prove interesting. In fact, in the case of a loan that is already well under way, the savings to be made on the few interests that remain to be paid will not be sufficient to offset the costs of the transaction.

According to an often validated rule of thumb, a home loan that has not yet reached the first third of its duration (i.e. 6 to 7 years for a credit over 20 years, for example) can be repurchased profitably as soon as the new interest rate interest is one point lower than the previous one (3% if the initial rate is 4%). If the credit reaches its second third, the differential between the two interest rates will have to be much larger, and at least equal to two points (2% if the initial rate is 4%). In the last third of the loan, the repurchase is in principle never profitable.

Obviously, this is only a judged indicator. The only way to verify the actual profitability of the operation is to carry out credit buyback simulations on the Internet or with a broker, without placing blind faith in the enthusiastic projections provided by competing banks.

Note also the presence of notary fees, which must also be taken into account when assessing the profitability of your project.

Reduce the duration of the loan or the amount of monthly payments?

Assuming the transaction is profitable, the borrower can benefit from the repurchase of his credit in two ways:

  1. Keep the loan period unchanged, which will reduce the amount of monthly payments. This option is to be preferred if the borrower is motivated by an immediate gain in purchasing power to improve his daily life.
  2. Keep the same monthly payment, which will have the effect of reducing the total duration of the loan by several months, or even several years. It is recommended to opt for this second route if possible, which has the advantage of deleveraging you more quickly and of repaying the principal owed more quickly.

Renegotiation and repurchase of credit: what difference?

The renegotiation and the repurchase of a mortgage are two operations often confused. We call renegotiation an operation by which the borrower asks his current bank to lower the interest rate on his loan. A repurchase of credit, meanwhile, consists in repaying the original loan thanks to a new loan taken out with a third bank.

Example of a mortgage loan repurchase

A mortgage for a total amount of $ 230,000 was taken out on May 12, 2014 over twenty years, for an interest rate excluding insurance of 4.5%. The monthly payment is $ 1,455.09.

As of January 12, 2017, the remaining capital due was $ 209,892. The borrower finds a competing bank which accepts to repurchase its credit and to propose a new loan to him at a rate of 2,5%. He opts for a reduction in the monthly payment, which only amounts to $ 1,272.51 for the remaining 208 months. After charging the prepayment penalties of the loan, which amount to $ 4,722, and the new guarantee of $ 1,000, the total savings for the borrower amount to $ 36,976, or a considerable sum.

Note that if the credit had been granted on May 12, 2011 and under the same conditions, the gain would be “only” $ 24,985, and less than $ 15,000 for a loan contracted in 2008. Suffice to say that a mortgage should be bought as soon as possible!

Reduce your monthly loan payments!

A project but already credits? Thanks to the grouping of credits, benefit from a single monthly payment at the best rate for your credits and your project!
Crédit Unique, broker in credit consolidation for more than 20 years, renegotiates your loans at the best rate.

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