When should I refinance my Mortgage Installment?

When should I refinance my mortgage ? Good question to ask. The subject of renegotiating a loan is certainly extremely topical. The historically low interest rates are a symptom of the continuation of a deep economic crisis. Crisis that can determine the unsustainability of the instalment of our mortgage. Fortunately, however, the same demonstration turns into an opportunity since we can renegotiate the mortgage obtaining better conditions than the original ones. In order to make our instalments more sustainable, the law, the banks and the market offer various solutions which, however, are often confused in the definitions, even overlapping one another.

That is why we will try to clarify it: Renegotation

It is precisely its literal meaning that suggests the simplest and cheapest way to achieve our goal. Renegotiate with the lending bank the conditions that had been signed at the time and subscribe to more sustainable ones and consistent with the change in the economic scenario and our needs. In most cases, a registered letter is enough to ask the bank to revise the conditions of our loan. It must be said, however, that only some parts of the contract can be modified so as not to incur in a “novation”, which compared to a renegotiation has very different connotations. We will be able to change the duration thus lengthening the amortization period, remembering that an extension of more than 20 years involves the renewal of the mortgage. We will be able to obtain a reduction of the spread (the gain of the bank) that above all on the variable rate determines the part fixed contractually and that therefore cannot vary giving greater breath to the total variability of our installment.

We will be able to pass from the variable rate to fixed rate (option less appreciated to the bank), or vice versa. The banks do not have too much difficulty to satisfy our requests, and maintain the customer and simultaneously decrease the risk related to the debt contracted. It is worth noting that some banks include in their loan agreement an automatic spread reduction clause in the presence of regular payments of installments for established periods of time. As anticipated in the previous lines there are contractual changes that go beyond the concept of renegotiation but represent a real “novation” more simply are changes such as to distort the original terms creating not little embarrassment to the lending bank:

Changing the amount of the original loan.

Change the amount of the mortgage.

Change the property given as warranty.

These are conditions which, for the bank, would put at risk the guarantee on the obligation assumed by us towards it. This is the case in which we can no longer speak of renegotiation of the loan, but we will have to take another under the new conditions that with its net proceeds goes to extinguish the previous one.

Then the more correctly we will talk about:

Substitution

It is intuitive how, in the case of a replacement loan, it will be necessary to incur expenses, new loan contract and therefore new notarial act. A good consolation is to know that, if the property to guarantee the operation remains our first home, fiscally we will continue to deduct interest. The replacement mortgage can be taken out through the same bank as the original mortgage, but lately banks have tended to no longer replace their own mortgages, effectively discouraging their convenience, or, as in most cases, through another bank that instead acquires a customer. In the logic of a replacement loan there is, for example, the possibility of changing the actors of the contract, such as removing a guarantor who, freed from our commitment, can help, perhaps, another family member or access credit more easily for their own needs. One of the characteristics of this type of mortgage is the possibility of obtaining, together with the residual capital of the previous mortgage, an additional amount for other types of needs. It is in this case that often different types of products are confused or overlap, it depends on the bank. In most cases this characteristic is typical of another type of mortgage:

Refinancing

Taking advantage of better conditions compared to the original mortgage, or simply because we have needs , in some banks, often with dedicated products, but in many cases more expensive than mortgages for purchase, we find the possibility to add to the residual capital of the old mortgage of the other liquidity. The banks that allow refinancing loans can, however, have very different rules among them, most of them related to the percentage of additional liquidity that can be granted. Percentages that can vary from 10% to 100%more than the residual capital of the old mortgage. Others even allow higher percentages, obviously always compatible with the maximum percentage that can be financed with respect to the value of the house offered as collateral .

Other rules may concern the method of disbursement, if the additional liquidity, for example, will be “officially” allocated to the restructuring of our house, the bank will be able to provide all together the amount allocated to the replacement of the old loan, to be paid to the original bank, and to the state of progress of works, the part allocated to the restructuring. In some cases, the bank could pay the contractor directly. In other cases we will have to declare, of the additional liquidity, the use that we will make of it, and the bank could decide to replace us in the operation; do we have to buy a boat? The bank buys it for us on presentation of the invoice.

Sometimes, however, you just have to attach the estimate of our future kitchen or new car. Another possibility is to take an additional liquidity “finalized” perhaps to the purchase of another real estate unit that otherwise the bank would not finance. This is the case, for example, of premises used for craft activities, those stacked as C2, or boxes or cellars not related to our first home, those stacked as C6 etc.. Of course, as always, every type of operation more convenient for us.

Advantages Renegotiation of the Loan

The purpose of renegotiating the loan is to enable the borrower to obtain conditions better suited to his needs; the main advantages of this practice are:

with the renegotiation of the loan, the previous loan will not be extinguished, in this way there will be savings in expenses and notary fees; the borrower does not lose the tax benefits provided by the original loan contract; the renegotiation of the loan does not involve any administrative costs, bank commissions or even the application of taxes and duties to be paid by the customer; the guarantees already recorded for the loan subject to renegotiation continue to assist the repayment of the debt on the due date.

Renegotiation of the loan: a new agreement between the bank and the borrower

In order to carry out a correct renegotiation of the loan there must be a shared agreement between the bank and the borrower, in fact neither the bank nor the client can unilaterally modify the conditions. In order to obtain the renegotiation of the loan it is therefore necessary that there is the consent of both parties, also in order to be able to modify only one of the clauses present in the original contract. The renegotiation of the loan does not involve any expense for the client and can be carried out, only through a private contract, even if not authenticated: for example, with an exchange of correspondence between the bank and the client, for which the presence of a notary is not necessary, the typical notarial expenses are in fact eliminated.

Considerations and reflections on the renegotiation of the loan

Two factors must always be taken into account when renegotiating a loan:

the bank is never too “happy” to sit down with the borrower again and thus to review the loan agreement it had previously entered into; there is practically no tendency to review a mortgage unless the borrower interrupts the payment of instalments for no reason. In fact, the loan is almost always renegotiated with extensions that allow the borrower to get back on track with the missed payments. The banks tend to satisfy the borrower by proposing conditions in the renegotiation phase that can mainly meet the interests of the latter.