In this period of economic crisis, mortgages are a burden for millions of families. Among fixed rates, subsidized, installments and other various amenities are really difficult to choose a formula that is convenient to save money on the mortgage. Let us try to clarify, remaining sure of offering disinterested advice. We underline the importance that each of you has to try to understand the problem. Once you understand how necessary you need to take action. You can do it yourself if you think you are able to exercise your bargaining power towards the bank, otherwise, we advise you to rely on an independent professional.
Save on the mortgage, yes but how?
The first concept to understand is that reducing the installment does not necessarily mean reducing the cost of the loan. First of all, therefore, it is important to understand if the main purpose we propose is to have some respite by reducing the amount of the installment (even if this implies a greater cost) or if the goal is to have a real savings on mortgage costs (savings that we will see in the long term).
The Good Government has introduced some measures to stimulate competition in the mortgage sector. Among these is the so-called portability that is realized with the subrogation of the loan. This measure, which made it very difficult to take off due to the incredible obstructionism of the banks, is now applied by many financial institutions and therefore represents a concrete alternative for reducing the cost of the loan.
The options to reduce the installment and / or the costs of the mortgage, today are different: care must be taken to inform yourself well. It is clear, in fact, that the old bank has every interest in giving information (sometimes incorrect or in any case partial) aimed at keeping the customer.
The evaluation of the possibility of renegotiating, substituting or replacing one’s mortgage must be based on an objective analysis of one’s situation, trying not to be influenced by easy clichés that use subjects in a conflict of interest. It is necessary to make an argument aimed at both economic and financial evaluation of the convenience of such operations. Evaluations that need information that is difficult to give spontaneously: you have to ask for it explicitly.
The role of the debtor
We must learn not only to play an active role but also to clarify ideas about our goals before starting any negotiations with the bank. If we are considering the possibility of changing the mortgage (whatever form we choose) the first question we must ask ourselves is: what is the main goal we want to achieve with the new mortgage?
Are we trying to change the loan for an urgent need (can you no longer pay the installment and risk missing some?) Or are we simply taken by surprise by the increase in rates and want to try to remedy it?
We are frightened by the increase in rates and we fear that this increase will continue so that we seek security with a fixed-rate mortgage? Or, more simply, we took out a mortgage when the competition in the sector was much lower and we want to check if we can save anything?
Let’s start by saying that in cases of extreme difficulty in paying the mortgage payment, most likely we have no margin of negotiation with the banks. The main solution to the problem should not be sought in the replacement of the loan, but in the reorganization of one’s life. Maybe we lost our job, maybe we are going through a difficult family situation, maybe we took the longest leg or who knows what else. In all cases, we must try to solve the main problem that does not allow us to pay the mortgage. As a last resort, we must consider selling the house if we realize that we cannot pay the mortgage. Finding a less expensive solution for your accommodation (perhaps buying a smaller house) would be a solution.
Save on the mortgage with the ABC agreement?
If we are in a situation of extreme difficulty paying the mortgage payments (perhaps we have already paid some installment late) the ‘solution-buffer’ best would be able to suspend the payment of the loan installments. In this way we would have the time necessary to reorganize our life. This hypothesis was contemplated by the 2008 Budget and then became a state law. It is envisaged that payment of mortgage repayments for the principal residence may be suspended for up to 18 months.
In the absence of this solution, adherence to the renegotiation proposal deriving from the Government-ABC convention represents a ‘mini-solution-buffer’. This is the only case in which we recommend joining the state renegotiation, for the simple reason that those who find themselves in extreme difficulty in paying the mortgage payments (to date) have no other solutions and cannot save on the mortgage.
In the case of contract renegotiation , all banks are obliged to execute the renegotiation for customers who request it even if they are bad payers. There is therefore no bargaining. Considering the characteristics of this state renegotiation, we reiterate that this hypothesis is to be taken into consideration only and exclusively by those who are in serious economic difficulties. With this solution the installment is lowered but the overall costs of the loan will increase.
In all other cases, that is when there is room for maneuver, it is appropriate to make specific assessments, so we return to the ability to self-assess one’s specific situation. To negotiate with the banks it is necessary, first of all, to know their strength.
Contracting power of the debtor
The cost of the loan depends essentially on two factors:
- its creditworthiness, also called credit scoring ;
- the interest that the bank has in granting mortgages at a specific time.
Instead, it is important to have elements to assess one’s creditworthiness and consequently one’s bargaining power.
In very large lines, credit scoring is calculated based on the following elements:
- total income;
- number of family members and associated expenses;
- any third guarantor;
- if an employee, type of employment contract (temporary or permanent);
- how much the property was paid, what was declared in place and what is worth today;
- presence of other loans in progress and of what amount;
- regular payments.
These elements are used to assess whether the customer is (and in what likelihood it will be in the future) able to pay the loan installments and possibly what other guarantees the bank will be able to activate. To have an excellent credit rating, a client should have – ideally – a stable income over time of an amount such as to have an installment / income ratio around a third. For example, if you have an installment of 1,000 euros you should have an income of 3000 euros.
It is very important to have always been regular in payments. If we have missed a few installments, it is quite difficult to hope for better conditions than the current mortgage from a new bank. In summary, therefore, from an assessment of one’s own situation the borrower must understand whether, and to what extent, he can be an attractive client for the banks.
Evaluate your mortgage
Having assessed your specific situation, it is necessary to start evaluating the loan you would like to change.
Simplifying, the three main data to know are:
- the residual debt;
- the remaining duration;
- the rate of your mortgage
in particular, the spread applied to the reference parameter (For those who have a variable rate mortgage, this is the 1-month, 3-month and 6-month euribor).
It is evident, therefore, that to save on the mortgage (and not only the installment) it is necessary to reduce the spread. The competition in the mortgage sector that has developed in recent years has meant that the average mark-up of banks in the sector has tended to decrease. The spread to which you can “aspire” depends on your credit worthiness.
Lower the spread to save on the mortgage
Obviously the banks offer a lower spread to those who have a better credit scoring. Going into practice, if years ago the banks applied spreads of even 2% or higher, today, a 2% spread would be considered impractical. A subject with an excellent credit scoring can also aspire to a spread of 0.6%, if at that moment, the commercial policy of the bank is oriented towards the achievement of certain budgets. Of course it is difficult for a customer to have an excellent credit rating. With an ‘average’ credit rating, you can expect a spread of around 1%.
If we succeed in lowering the spread by 0.7% the savings of the installment begins to be appreciable: about 3% over 10 years and about 5.5% over 20 years of residual duration (for an installment of 1,000 euros per month, for 20 years, there is talk of about 13,000 euros less in interest).
If we need a significant reduction in the installment (over 10%) it is necessary to act (when possible) on the extension of the residual duration of the loan. In this way, let’s be clear, we will not reduce the cost of the mortgage, we will only make it more bearable.
The main road to pursue to reduce the mortgage payment and / or reduce the cost of the loan is the free market. There are more than one roads, and more precisely:
- classic renegotiation
- renegotiated agreement (Government-ABC Agreement).
The common characteristic of the four instruments mentioned is that of being voluntary.
The parties (customer and bank) choose to do the transaction if they consider it convenient. The new rules on competition in the mortgage market have reduced the obstacles that make it possible to choose a new bank, but the new bank obviously must have the advantage of paying the loan.
Assistance of an independent freelancer
Here we must make a choice. If you believe you are in a position to achieve considerable savings on the mortgage (at least above 10,000 euro) from the changing conditions of their mortgage or by the change of the mortgage, it may make sense to rely on a free independent professional since the fee due to him , with a good chance, it will be compensated by the greater savings and greater effectiveness of the negotiation with the bank.
The freelancer supports the client to help him choose the best alternative for him, both economically and financially. His goal is to give the customer an additional service.