How to refinance your home loan in France?

Posted on 08 Jul 2020 in Market
How to refinance your home loan in France?

1 – Refinancing: How does it work?

Thinking of changing your mortgage in France to benefit from lower rates? When interest rates fall, it can become interesting to renegotiate a mortgage (mainly repayment mortgages) or have it repurchased by another lender to obtain a better rate.

Refinancing, what are concretely the potential benefits?

  • – reduced monthly repayments and/or
  • – a reduction in the repayment period.

Renegotiating a loan with your bank is your easiest option as it avoids starting the application from scratch with all the required documents if the loan is bought by another lender. It also makes it possible to dodge the early repayment charges required by all the banks in the event of an early repayment with a fixed rate. You still need to look at the remortgage costs with your own bank. Renegotiating the mortgage with your initial lender will not be free. Expect a couple of thousand euros for admin fee.

The buyout of a mortgage by another bank allows competition and it is often possible to obtain more favorable conditions from a competitor than from its own bank. However, in this case too, you will have to pay various costs.

2 – Refinancing with your own bank?

The first thing that differentiates renegotiating from having your mortgage refinanced from another lender is the method of calculating the costs. You have signed a contract with a bank. This therefore requires compensation in the event of early repayment, in the context of a repurchase by another lender of the rest of your loan.

This makes refinancing with your own bank usually much more advantageous. But your bank will be in a better negotiating position. Your bank knows that if you want to go to a competing lender that offers you a better rate, it will cost you significant fees. They will most probably take advantage of this situation and refuse to renegotiate your loan.

A mortgage adviser can tell you the amount of the penalty that applies to your situation. You will be able to determine whether the premature replacement of your mortgage will give you a financial advantage or not.

For non-residents wishing to refinance, we advise you to negotiate with your bank first. If nothing can be done, then we can step into the negotiation by working with the competition.

3 – Is it worth it?

The termination of a mortgage contract before the expiration of the term often results in a penalty. Depending on how much the outstanding balance is, the bill can amount to several thousand euros. Not to mention that you also have to pay administrative fees related to the new mortgage, such as new bank fee, new broker fee, new mortgage registration tax and notary fees, ERC.

For your mortgage renegotiation operation to be effective and allow you to generate significant savings, your outstanding capital will have to reach a certain amount. Below, it is not necessarily interesting to renegotiate your loan since the costs linked to the operation cannot be covered by the savings made. French Private Finance estimates for a refinance to be worth it to achieve a rate difference of at least 0.6 – 0.7%.

On a mortgage of 500,000 €, if your current offer is (let’s assume it just started):

  • – 20 years
  • – 2.25% fixed for the term

Total interest over the term = 121,370 €

We could get you:

  • – 20 years
  • – 1.65% fixed for the term

Total interest over the term = 87,370 €

On top of it, you would need to pay:

  • – New bank fees = 5,000 €
  • – New mortgage registration tax = 6,655 €
  • – Broker fees = 5,000 €
  • – Early repayment penalty with the original bank = 5,625 €

Total save = 121,370 € – 87,370 € – 5,000 € – 6,655 € – 5,000 € – 5,625 € = 11,720 € 

With a decrease of 0.6 on the rate, the save is ‘’only’’ 11,720 €. It is obviously better in your pocket rather than someone else’s, but that is 11,720 € over 20 years.

Compared to the fees paid upfront, one could consider it’s not worth it. You have to keep in mind that the 11k of savings is only if you keep your mortgage until its term. (no early repayment).

With a rate of 1.85% for example, the total interest over the term is 98,573 €.

121,370 € – 98,573 € – 5,000 € – 6,655 € – 5,000 € – 5,625 € = 517 €

It shows that with a decrease of 0.4 on the rate, you break even over 20 years so there is no point at all to refinance with another lender.

That’s when the best route is to try and negotiate directly with your current lender.

4 – Comparison with the British system

In France, refinancing is not something as common as in the United Kingdom for example. This is due to various reasons :

  • – French banking culture: French people usually bank where they have their loan.
  • – Costs involved in a remortgage.
  • – Less competition between lenders.
  • – Long term fixed rates (20-25 years) are much more common than variable rates. 
  • – The amount of time, administrative work and documents needed.

In the UK, the shorter duration almost forces buyers to refinance frequently, and long term fixed rates are simply uncommon.

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