The mortgage is a right assigned to a lender on a property as collateral for the payment of a debt . The owner of the house or apartment is not dispossessed of it. However, in the event of payment incidents, the financial institution may seize the property and sell it at auction in order to recover the capital remaining due and the interest.
The mortgage guarantee is also inseparable from the land registration system, which means that you have to go before a notary authorized to use it. What are the notary fees for a loan buyout with mortgage? What are the advantages of buying a mortgage but also the dangers? And above all, what is its operating principle? Here are all the things you need to know before embarking on a risk-free mortgage consolidation transaction.
Mortgage loan buy-back: definition and principle
The consolidation of credits by a mortgage loan is reserved for owners who decide to cover their loan by putting their property in mortgage. This guarantee generally reassures lending organizations that can make an offer to buy back mortgage at a more advantageous loan rate. During this operation, the borrower can merge consumer loans and even bank debts with mortgage loans.
Note however: the repurchase of credits will be subject to the legislation on real estate loans if it is made up of more than 60% of real loans. Otherwise, when consumer loans and personal loans represent more than 40% of the transaction, we speak of buying consumer loans.
Good to know : if the first mortgage taken out already involves a mortgage guarantee, then this is simply renewed as part of a renegotiation with the same lending institution.
The repurchase of credits by a mortgage loan makes it possible to group funds for a larger amount than in the context of a repurchase of conventional consumer credits. However, it generates costs to be taken into account in calculating the overall cost of the operation. This is particularly the case because the procedure requires the use of a notary.
Good to know : the amount of the mortgage is equivalent to the price of the property on the market to which is applied a discount generally between 10% and 25%. Example: your house is currently worth $ 200,000 on the market. The financial envelope of the mortgage to guarantee the new loan is between 150,000 $ and 180,000 $.
The notary is a compulsory intermediary
Going before a notary is compulsory for a buyout of a mortgage including a mortgage guarantee. In France, this public officer is the only person empowered to direct the procedure, with the exception of singular cases such as the mortgage taken by a court.
In addition to his role of advising on the transaction, he informs the borrower on the ins and outs of the notarial deed. The notary underlines in particular the possible consequences of a mortgage loan, that is to say the foreclosure of the property and its auction to repay the loan contracted in the event of payment incidents.
Is it possible to keep the same mortgage made for your first mortgage?
No, the repurchase of credits obliges to reimburse the first real estate loan subscribed in return for the payment of indemnities for the early repayment. This procedure automatically closes the mortgage, necessitating the taking of a new one. It is however possible in the event of a reloadable mortgage or when the repurchase of credits and the mortgage are made with the same organization. This is called “renegotiation” and not the repurchase of credits.
Does a homeowner have to resort to a mortgage guarantee to conclude a loan buy-back?
No, this recourse is not compulsory, especially since it commits the possible seizure of the property in the event of payment incidents. This type of guarantee deserves consideration. Whether it’s a consumer loan buyout or a home loan buyout, mortgage guarantee isn’t the only option. Indeed, the borrower can use other types of guarantees to reassure the bank, for example:
- an agency bond;
- the surety of a natural person (or guarantor);
- the pledge of an investment or a savings contract (life insurance, term account, etc.).
Are mortgage loan redemption rates better than simple mortgage loans?
A buyout of a mortgage loan guaranteed by a mortgage will be subject to an interest rate identical to a conventional mortgage loan guaranteed by a surety body for example.
The interest rate on a loan mainly varies depending on the economic situation, the profile of the borrower, the counterparties granted and the duration of the loan.
Does buying a mortgage mean changing banks?
Not necessarily, because the repurchase of credits does not impose the transfer of file which allows the borrower to keep his bank accounts and his savings books in one bank and to carry out a repurchase of mortgage loan in another.
However, most banks make the granting of a mortgage conditional on salary domiciliation . Consequently, if your credit combination includes one or more home loans, you may have to open a new account and transfer all or part of your banking products and services to the new establishment.
What are the costs of buying back mortgage loans?
The appearance before the notary involves costs and the payment of fees. These are set by the public officer. As a general rule, the notary’s fees, that is to say his remuneration, represent 10% of the total amount of the costs. The rest corresponds to 10% of disbursements and 80% of taxes paid to the State. The notary fees take into account the amount of the loan repurchase as well as other criteria such as for example the number of loans to be repaid.
When the borrower has taken out a first mortgage, the repurchase of a mortgage requires the mortgage to be lifted after the prepayment. This is called the mortgage lifting costs in the event of a mortgage.
What happens if the initial mortgage is guaranteed by bond and the new bank imposes a mortgage? The subscriber will only have to pay the costs related to the new mortgage guarantee. But no matter what, all of these costs are usually included in new funding. They average 2% of the transaction amount.
What are the advantages of buying mortgage loans?
The reassuring impact of the mortgage guarantee is positive for the lender. This formula can make the difference, especially for files deemed more fragile, provided that the loan repurchase does not deteriorate the current financial situation.
The bank covers itself by obtaining the real estate mortgage. This means that in the event of repayment incidents, it can resort to foreclosure of the house or apartment and sell the property by auction to recover the debts. It does not matter that the subscriber has finished repaying his mortgage.
The mortgage is therefore a solid argument with a view to validating the feasibility file. Obviously, this opportunity exists only for owners who can hope to improve their budgetary situation, reduce their monthly repayment or obtain additional cash at a lower cost to finance a new personal project.
Mortgage credit is also a possible option for people threatened with being registered on the FICP (national file of incidents of repayment of loans to individuals). Why ? Because consolidating your credits allows the balance of debts and loans in progress, possibly with the release of additional cash to finance urgent expenses. It is thus possible to see his monthly repayment greatly reduced. Without the credit repurchase, the various cumulative monthly payments could have put the subscriber in a situation of over-indebtedness.
What are the disadvantages of buying mortgage loans?
If the fact of mortgaging a property makes it easier to obtain a loan repurchase, the risk for the borrower is nonetheless not negligible.
Indeed, in case of default, the bank can seize the house or apartment and sell it to repay the debts of the borrower. This can happen at any time, even when the borrower has repaid his credit for many years without encountering difficulties and in the last years or months there have been payment incidents.
The second drawback of buying mortgage loans is that they generate additional costs and formalities compared to a conventional mortgage. Indeed, it will be necessary to go through a notarial study, source of costs and lengthening of the deadlines for the finalization of the loan.
Finally, when loans are bought back by a new bank, the borrower is generally asked to transfer their accounts. This can lead to administrative complexity. However, since the Macron law, the change of domicile has been greatly simplified for individuals.
Example of a mortgage loan buyout
In order to understand the operation and the interest of a mortgage loan redemption, here is an example of operation:
- Situation before the repurchase of mortgage credit:
Couple’s monthly net income: $ 4,000
Monthly charge for repayment of the mortgage on their main residence: $ 1,200. Remaining capital due on this loan: $ 100,000
Monthly charge for repayment of a car loan: $ 500. Remaining capital due: $ 5,000.
Or a total monthly payment of $ 1,700. The household debt ratio is therefore ($ 1,700 / $ 4,000) x 100 = 42.5%, beyond the 33% recommended. The couple’s remaining living is $ 4,000 – $ 1,700 = $ 2,300.
- Situation after the repurchase of mortgage credit:
Total amount of capital remaining due: 105,000 $
Approximate amount of costs linked to the operation (early repayment indemnities, mortgage guarantee costs, administrative costs, etc.): $ 3,000.
In order not to deprive themselves of their cash, the household borrows the entire amount, i.e. $ 105,000 + $ 3,000 = $ 108,000.
By borrowing this amount over a period of 10 years at the APR (overall effective annual rate) of 2%, the monthly loan is now $ 920.13.
By combining the couple’s mortgage and consumer loan, borrowers now have a debt ratio of ($ 920.13 / $ 4,000) = 23% instead of 42.5%, which is lower than the recommended debt ratio ( 33%). The remainder is $ 4,000 – $ 920.13 = $ 3,079.87, instead of $ 2,300.
The couple’s situation is therefore improved and consistent with their income thanks to the repurchase of mortgage loans.
Mortgage loan buy-back: the opinion of your exchange expert
A mortgage buy-back is a transaction that needs to be carefully considered. However, providing a mortgage is an effective way to get a home loan at the best rate. In order to simplify its procedures and understand all the ins and outs of such a loan, it is possible to use an expert in mortgage buy-back: the broker.