Early repayment of home loans

by Sharon Garcia

A borrower can always, at any time, prepay his mortgage. The bank can not oppose an early repayment, except if it is a partial refund of an amount less than or equal to 10% of the initial loan amount (Article L312-21 of the Consumer Code) ).

The early repayment corresponds to the settlement of the outstanding capital, before the originally scheduled term of the loan.

The early repayment is total when you repay the entire capital outstanding, in case of sale of real estate or renegotiation of credit, for example.

The early repayment is partial when it relates to a part of the sums due, in case of exceptional cash inflow for example.

The conditions for early repayment are set in the contract

The conditions for early repayment are set in the contract

To compensate for the shortfall from interest that will not be paid, the lending institution may demand the payment of an indemnity, or penalty, for early repayment. It is not compulsory. That is to say, the lender can claim his payment only if this compensation is mentioned in the contract.

Before the conclusion of the loan agreement, it is possible to negotiate the reduction or even the cancellation of this prepayment allowance. The lender may agree to remove this indemnity, but after a minimum loan repayment period. But in many cases, the clause stipulating the absence of an early redemption fee will not be applicable in the event of the loan being bought back by a competing credit institution.

The conditions of the early repayment are to be studied closely. For “adjustable” fixed rate loans, the contract is often subject to the possibility of partial prepayments without penalty.

The amount of the early redemption fee is capped

The amount of the early redemption fee is capped

This prepayment allowance may vary depending on the type of loan. If it is low or zero for adjustable rate loans, it may be high for fixed rate loans.

The loan agreement sets the amount of the Early Redemption Amount (ARI) you will have to settle with your institution. The amount of compensation is limited by law (Article R312-2 of the Consumer Code). Its amount can not exceed 6 months of interest on the capital repaid at the average rate of the loan, without being able to exceed 3% of the outstanding capital.

You have taken out a loan of 150,000 USD, at the nominal rate of 4%, repaid over 20 years. At the end of 7 years, you repay in advance the total outstanding capital of 110,430 USD. The maximum prepayment compensation you will have to pay will be 2,208.60 USD. It corresponds to the lowest result of these two calculations:

  • 6 months interest on the amount reimbursed: 110,430 x 6 x 4% / 12 = 2,208.60 USD.

  • 3% of the outstanding capital: 110,430 x 3% = 3,312.90 USD.

Alternatively, instead of full repayment in advance, you make a partial early repayment of 40,000 USD. The maximum prepayment compensation you will have to pay will be 800 USD. It corresponds to the lowest result of these two calculations:

  • 6 months interest on the amount reimbursed: 40,000 x 6 x 4% / 12 = 800 USD.

  • 3% of the outstanding capital: 110,430 x 3% = 3,312.90 USD.

The consequences of an early partial refund

The consequences of an early partial refund

A partial refund of the credit modifies the original loan schedule. You can choose to reduce the amount of the monthly payments, by maintaining the initial duration of the loan. This way, you reduce the monthly repayment charge, but not the total cost of the loan. Either you continue to repay the amount of the original maturities, which allows you to reduce the loan term and therefore its total cost. You can also choose an intermediate solution mixing the two previous ones. Review your loan agreement to see if any of these options are applied by default by the lending institution.

Since the law of 25 June 1999 relating to savings and financial security, for loan agreements concluded as of 1 July 1999, no indemnity is due by the borrower in the event of early repayment motivated by the sale of the property following a change in the place of business activity of the borrower or his spouse, the forced termination of the professional activity (dismissal, etc.) or the death of the borrower or his spouse. (Article L312-21 of the Consumer Code)

In practice, you must contact the lending institution and indicate the amount you want to repay. In case of agreement for partial prepayment, a new depreciation schedule will be given. The early repayment of the loan also occurs frequently in the event of resale of the property or as a result of a significant cash inflow. Whatever happens, do your calculations!

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