With the fall in mortgage rates, we talk a lot about the opportunity to renegotiate its mortgage, provided that there is usually a differential of 1 to 2 points depending on the case. There is less talk of loan consolidation especially when you have another loan beside the mortgage. Without wanting to oppose these two options, here are some ways to help you make the right choice.
Credit rates ranged from 3.40% to 4.62% five years ago. They fell sharply from 2011 to November 2016 (with a lower rate at 1.40% at 20 years). They then recovered to July 2017 before starting a slight decline to stabilize in November and December 2017 (around 1.65% to 1.80% at 20 years). This steady decline is the result of the decision of the EurCen Bank (EB) to sharply lower the Euribor rate. This rate corresponds to the rate at which the banks lend money to each other in the short term and to which are paid the deposits in the funds of the EurCen Bank. A further rate cut is not possible in 2018 because banks are at the limit of their break-even point. Similarly, a sharp rise in rates is also not possible in 2018 because banks would be caught between soft loans at low rates and much more expensive purchased money. Is it appropriate for today to renegotiate its mortgage or to consolidate its credits?
The benefits of renegotiating real estate loans
With the steady decline in mortgage rates, the renegotiation of the loan seems to have become very attractive. This is the opportunity to get a better rate and thus achieve substantial savings to reduce either the amount of your monthly payment or the duration of your credit. However, this solution is not always advantageous from a financial point of view. In the case of a conventional fixed rate loan, each maturity includes a portion of the subscribed capital and a portion of the interest, the distribution of which varies during the loan. In the beginning, interest represents the largest share, and over time each monthly payment is almost exclusively capital. As a result, renegotiating one’s real estate loan is only worthwhile when the share of interest in the amount of each monthly payment is still high, usually during the first third of the life of the loan. Refer to the details of the repayment schedule for interest and principal. Overall, the interest rate differential must be large enough (ideally, 1 point) to cover transaction costs, which can go up to 4.5% of the outstanding capital. For example, for recent loans of more than 300,000 euros or subscribed for more than 20 years, a difference of 0.70 points can do the trick. Simulations are needed by getting closer to his credit institution.
The benefits of pooling credits
The lowering of interest rates also favors the regrouping of credits provided that there is another credit beside the mortgage. On the one hand, the management of your budget is simplified because you have a single monthly payment, a single rate and a single dedicated financial institution. On the other hand, you benefit from adapted financing, which allows you to adjust the amount of your monthly payment or the duration of your credit according to your situation. But it usually involves a longer period and causes a number of costs:
- the prepayment penalties, generally equal to 3% of the capital, without being able to exceed 6 months of interest on the repaid capital.
- new banking fees
- bank guarantee fees
- the costs of a permanent and definitive disability insurance.
Hence the obligation to measure the overall cost of loan consolidation through simulations that will allow you to look at the consequences of the consolidation of credits on the outstanding capital, the loan payment and the overall cost of the initial mortgage.. There is a moment from which, the remaining capital of the new credit will be less than the outstanding capital of the mortgage. This moment called “tipping point” is the time it takes to amortize the pool of credits. Before that date, you will lose money by selling your property. If you plan to keep your property for many years, consolidation will not be a problem. On the other hand, if it is a property that you want to resell in the short or medium term, or if you think that your family or professional situation will evolve in the short or medium term, be careful, calculate your tipping point even if the difference between the two interest rates, that is, between the initial credit interest rate and the interest rate proposed for redemption, is greater than 1%.
Other benefits of pooling credits
Consolidation of credits (mortgage and other credit) also has other advantages, while preserving your budget, for example:
1- to be able to realize other projects including real estate (the acquisition of a new good) by lowering your debt ratio,
2- to be able to request additional cash to carry out development work for example,
3- to have a single monthly payment and a single rate.
By performing simulations, you can calculate your leeway to finance a new project: the financing of your children’s studies, the completion of work, the change of car… The credit institution must give you an information document allowing you to compare the financial characteristics of outstanding credits with the financial characteristics of the credit pool.
Loan consolidation is a global solution that allows you to bring new projects to life without waiting for a full refund of your outstanding credits. It’s a way to boost your finances!