– How to get out of a commitment to a fixed installment mortgage
Even if the situation seems hopeless in the case of an installment mortgage, there are often possibilities to free yourself from the commitment
Dimitri Cassard – Regional Manager at MoneyPark
Published today at 8:20 a.m.
Your columnist: Dimitri Cassard, regional manager at MoneyPark.
DR
By tiering their fixed-rate mortgages into tranches of different durations, many mortgage takers find themselves tied to their financial institution for a long time.
The good news is that there are ways out, even if there is no single solution that fits all cases. Here’s how.
Staggering as a customer loyalty tool
Six years ago, a young couple took out two installments of mortgages lasting six and ten years respectively. The first tranche will mature next summer and the second, just four years later.
When refinancing the first financing, their usual bank makes them an offer with high rates compared to the rates quoted by the competition. However, changing service provider seems difficult because of the second loan which expired four years later. It is in fact difficult to find a service provider who agrees to take on only part of the financing for a given object.
Like many other mortgage takers, the couple made themselves dependent on their financial institution by splitting their fixed-rate mortgage. A staggering or fractionation, or even splitting as this division into tranches is also called, is therefore most often a customer loyalty instrument which may prove to be of little advantage in the long term.
Harmonize durations
Fortunately, there are solutions. The simplest is to extend the tranche which is maturing with a four-year fixed rate mortgage or a Saron mortgage. The idea is, at the end of the second tranche, to renew both loans at the same time with a new service provider.
Note that some financial institutions offer to take over financing tranches in a sequenced manner over time as long as the latter have a difference in duration of a maximum of two years. For example, resumption of a first loan on January 1, 2024 and the second on January 1, 2026 at the latest.
Calculate if it is cheaper to switch despite penalties
The second solution is to calculate the amount of the early repayment penalty to be paid if the couple cancels the second tranche at the same time as the first financing expires.
There are dedicated calculators on the internet for this. The early repayment penalty can be compared to the interest savings made by changing service provider. If conditions permit, it is worth checking whether this penalty can be financed by an increase in the existing loan. We know that changing service provider saves 0.4 to 0.8% in interest rates. In fact, it is the average difference between the cheapest provider on the market and the average rate of all providers.
Amortize the tranche maturing
Finally, the couple can also decide to amortize all or part of the tranche coming due. Amortization is also one of the rare reasons that makes splitting wise.
For example, if the couple expects an inheritance advance in the near future, they can use it for amortization, then renew their second tranche of financing when it comes due.
Note that if conditions are suitable, this couple may request, during this second refinancing, an increase in their loan in order to recover the cash invested during their amortization. This will allow it to raise funds to carry out, for example, a project linked to the property in question (renovations, expansion), a new investment (purchase of a second home or an investment property) or even plan its future (implementation of pension solutions with a retirement perspective and/or coverage of disability and death risks).
Our example shows this: splitting the mortgage into several tranches is not necessarily relevant. The conditions offered by financial institutions evolve over time. The most interesting establishment currently will not necessarily be so in two years. As mentioned above, the rate differential can be significant from one provider to another.
It is therefore essential to be able to remain mobile while retaining the possibility of moving your financing according to the conditions offered on the market.
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2024-03-13 10:22:21
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