Your mortgage loan repayment contract provides for the possibility of early loan repayment. Technically, this means that you have the right to pay all or part of the remaining amount due, either to reduce the total duration of the credit, or to settle your loan in a single payment – for example if you have a sudden back payment money or if you want to redeem your credit to take out another elsewhere.
But to do this, you must comply with certain conditions provided for in the contract, and in particular the possible payment of a penalty. You will know while reading this section of the guide dedicated to the prepayment of mortgage.
What is the prepayment of home loan?
Imagine: you receive a large sum of money, whether it is a professional bonus, an inheritance or a gain (lottery, game, etc.). You wish to use all or part of this welcome sum to relieve the weight of your mortgage, or even to settle it before the date provided for by contract. This is called home mortgage prepayment.
This action can take two forms:
- Partial: the amount spent on early repayment of the mortgage does not cover the entire amount due. You will still have part of the principal to repay, but thanks to the amount injected, you can choose to reduce the amount of your monthly payments or reduce the duration of the credit (or do a little of both).
- Total: the amount injected is sufficient to settle the entire amount of your loan. You end your mortgage.
Namely: with the partial option, you choose the amount allocated to the prepayment of mortgage. However, certain contracts stipulate a minimum amount, for example 10% of the initial capital (unless this sum makes it possible to settle the credit, in which case there is no minimum threshold).
There is no notice period to request an early repayment of a mortgage. You just need to indicate the amount you want to repay. A new amortization schedule will then be given to you by the lending organization.
However, the unexpected gain of a sum of money is not the only reason why you might want to make an early repayment of a mortgage: it can also be the case if you want to buy your credit from the bank for get a better rate at another establishment.
Depending on your contract, the possibility of early repayment of a mortgage may be subject to the payment of a penalty. These prepayment charges are generally provided by the bank or the lending institution to compensate for the shortfall (in terms of unpaid interest) caused by the balance of a mortgage.
Please note that these penalties are considered as “additional costs”, in the same way as the administrative costs and interim interest.
Rules relating to prepayment penalties
However, the prepayment penalties comply with rules:
- They cannot be greater than a sum equal to 6 months of interest on the capital remaining due, or
They cannot exceed 3% of the capital remaining due before early repayment of the mortgage. For example, if you have $ 50,000 left to repay on your initial capital and you want to repay it in advance, you will have to pay $ 1,500 in penalties. (not necessarily it is six months of maximum interest)
For mortgage loans, the conditions are also set by the consumer code (articles L313-47 and R313-25). According to these texts, the indemnity must not exceed 6 months of interest from the sums reimbursed at the average rate of the loan. A second limit is explicitly imposed: the compensation must never exceed 3% of the capital remaining due before the early repayment.
Compensatory interest may be added in the case of a variable rate loan. All the terms of early loan repayment are provided for by the Consumer Code.
Exceptions to know
There are cases where the bank (or the lender) does not have the right to charge prepayment charges. Here are which:
- If you are forced to sell your accommodation for professional reasons, or following a cessation of your professional activity for different reasons (dismissal, illness, injury, disability);
- If you die (your loved ones will not have to pay these penalties) or if your spouse dies;
- If you benefit from a zero rate loan or an employer loan;
- If you have taken out a variable rate mortgage with a large variation (more than 2%).
Note that the first two cases (forced sales) are valid only for loans taken since 1 July 1999.
Can we negotiate an exemption?
In all other cases, you can always try to negotiate the exemption of the mortgage loan prepayment indemnities with your bank. If you are a “good customer” (with an excellent borrower profile, with monthly repayment on time and no difficulty with payments, etc.), negotiation will be facilitated.
You can also negotiate with your banker before signing your loan contract, for example if you have good reason to think beforehand that you could make a mortgage loan prepayment.
Finally, check your credit agreement: the prepayment fees are only due if they are explicitly recorded on the document signed with the lender.
Should we opt for the prepayment of loan?
In any case, if you want to use the prepayment of mortgage, start by doing your accounts: will the operation be financially attractive? Will the loan interest gain be greater than the amount of the penalties? If you have benefited from an advantageous interest rate and you have few years to repay, you probably have more to gain by placing your money in a profitable account and continuing to pay the monthly payments. If, on the contrary, the repayment period is greater than the already repaid period, the option of early repayment of the loan may prove to be profitable.
Estimate your outstanding amount thanks to our calculator, and calculate the amount of your prepayment penalties!