Extension of the duration of the loan: a possibility of breath for everyone
The increase in the restriction of consumer credit, that is to say, the one we try to access when we think of carrying out an important project such as buying a house, has generated a suffocating spiral for many consumers. The guarantee conditions required by the banks to take out a mortgage have undergone a severe tightening in recent years. But what does a bank ask for as a guarantee?
- The first guarantee required is an income guarantee , ie an income that is as stable as possible and of an amount such that the mortgage payment does not exceed 20-30%. To understand if you earn 1200 USD a month your ideal mortgage payment would be a maximum of 360 USD. In the past, this percentage has even reached 50%, but the possibilities of income growth were more concrete than this moment with a GDP of minus.
- The second guarantee required is of capital, that is, you must have a starting capital. In the past few years some banks were willing to provide 100% mortgages, ie mortgages where you do not have to pay any advance and the bank finances the purchase amount entirely. The average value was however 80% of the value of the asset. Currently on this parameter the banks have pulled the belt giving willingness to finance on average 60-70% of the total amount
- The third guarantee is the mortgage guarantee ; a technician authorized by the bank will evaluate the asset you wish to purchase and, if adequate with the amount requested, will put a mortgage on your home at the same time as the loan decision. In essence, if you do not pay the mortgage payment, the bank will in most cases take the asset. Mortgages currently travel between 100% and 200% of the amount requested. So if you have requested 50,000 USD of mortgage with a 200% mortgage, the bank is authorized in case of non-payment to obtain the equivalent of 100,000 from the sale of the property.
If you managed to give the three guarantees mentioned above, the bank will decide the loan for the amount requested with the type of rate you requested (fixed, variable, with CAP, renegotiable, mixed) and calculated taking into account Euribor in the case of the variable and Eurirs in the case of fixed plus the spread, ie the bank’s actual gain on the loaned capital.
We are now going to understand what is the EXTENSION OF DURATION and why it could potentially offer a possibility of breath for everyone. Let’s suppose that you have requested and obtained a twenty-year mortgage for the purchase of your home and suppose that regular payment months have already passed.
For personal reasons you realize that the mortgage payment is too high and risks not being able to support it. At this point, contact the bank and ask to renegotiate the duration of the loan. The bank will proceed to calculate the residual capital you have left to pay and if compatible with your age, you can propose an extension of the loan that should probably lead to a lowering of the installment.
Because probably: our request to renegotiate the duration will lead the bank to recalculate the parameters of our mortgage and if it still maintains the same type of rate, the value of the rate could vary as it would re-index the rate at the time of our request.
What are the risks?
The risks are practically nil as the client is free not to accept the new conditions and keep the mortgage in the state in which it was.
What are the disadvantages?
The reference rate (Euribor or Eurirs) may have increased with respect to our first resolution or the bank for a longer duration could ask for a greater spread as guarantee. All this would obviously have the effect of increasing the installment and consequently the maneuver would not be done.
What are the benefits?
More time to pay the mortgage with a lower installment
Possible lowering of the overall rate with less interest then to pay the bank over the years.
So you just have to take your mortgage and evaluate the installment, duration and rate. If something as applied by the bank is too burdensome for us, we can try without any particular risk the way to renegotiate the duration.
It is clear that it is not only our reference bank that can make us an offer, so during the end of the year, when the banks have to close their budget, it is a good idea to take a tour of the offers of the credit institutions and understand if our mortgage can become in few steps and without risks, less suffocating.
What you absolutely must know before starting any renegotiation:
First of all it is fundamental to consider the difference between EXTENSION and SURROGATE. EXTENSION aims to change the duration only; In this case the institution could choose to apply on your request the same rate it had agreed with the first resolution. This choice is up to the bank but it should be checked which rate the institute would apply for a new loan. In fact, for example, if you have obtained a mortgage with a finished rate of 5% it is important to understand which part of this rate was the index (EURIBOR or EURIRS) and which part of the spread because the bank, even if applying a low reference rate, could load the spread deciding on a mortgage with a finite rate higher than what you already paid. And this “trick” could be disguised by the lowering of the installment due to the extension of the duration.
The SURROGA instead happens passing our mortgage from one bank to another that offers better conditions. By law this step takes place at no cost, the institution you leave cannot charge you some penalty and cannot put in place any action to stop it. You can, at the most, formulate a counter-offer. The SURROGA unlike the simple EXTENSION generates the re-discussion of the entire system of loan conditions. Therefore, with SURROGA as well as changing institutions it is possible to pass from a fixed rate to a variable, to vary the duration or as many ask for a surplus of liquidity in addition to capital.
Usually the bank itself offers you the provision of some liquidity in addition to the residual capital. Attention, however, behind this apparently harmless offer lies a dangerous financial pitfall. In fact, inserting the word “liquidity” into the purpose of the loan generates an immediate increase in the rate since the capital offered as liquidity is a capital for the riskier bank. The pitfall lies in the fact that, being only one, the rate applied to the loan is also used to finance the amount to buy the good at a rate designed for liquidity, and therefore higher.
A serious bank, however, is usually very clear with the client and conditions such as this are explained in detail by the consultant who acquires the subrogation request.