Home mortgage: why it’s better to adjust your monthly payments than to suspend repayment

Technical unemployment for salaried workers or employees at home, closure of restaurants, bars and markets for the self-employed … Many French people experience (or will experience) a significant drop in their income with the confinement period. Among them, some had even contracted debts with a bank, in the framework of a housing or consumer credit. To relieve them, a solution is provided by the establishments: the extension of the deadline. Several large national and mutual insurance companies have confirmed that they will apply this device to customers who are most in difficulty. A useful solution, but one that is not painless for the borrower.

Because in reality, there are two types of deferrals: partial, or total. While the partial version allows only the payment of principal to be suspended, the total version also includes interest, and in rare cases insurance. “It is the total carryover that is practiced by the overwhelming majority of banks,” said Sandrine Allonier, spokesperson for the broker Vousfinancer. Depending on the institution, the borrower has one to twelve months of deferral, but most often the contracts provide two or three. The monthly payments are thus shifted at the end of the loan.

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And the individual, by getting rid of the repayment of his loan, mechanically increases the cost of his credit. Interest is, when it is not paid, considered by the bank as principal owed. But if the capital increases, so does the interest. “To sum up, interest in turn generates interest”, explains Sandrine Allonier. Such an approach also obliges the organization to publish a new schedule, often synonymous with endorsement fees which again will be billed to you. Finally, it should be noted that a 6-month postponement can ultimately extend the credit by 8 months, to compensate for the non-reimbursed interest. A 12-month break can even imply… 16 new monthly payments.

A 6-month postponement increases the cost of credit by more than 5%

The additional cost depends on several factors, and first of all on the progress of the loan. As the share of interest is much higher at the start of the loan, the operation will be more expensive in the first years of credit. Obviously, the longer the deferral period, the greater the amount of unpaid interest. As proof, these simulations provided by Vousfinancer. A couple who borrowed 200,000 euros over 20 years at 1.5% two and a half years ago (January 2018) and paying 965 euros in monthly payments, would see the cost of their credit increased by 1,775 euros if they totally suspend its repayments for 6 months from May 2020. Or precisely a 5.6% increase on the cost of the initial credit of 31,616 euros.

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If as a security measure, the client wanted to obtain a 12-month postponement, the additional cost would then rise to 3,565 euros, or 11.3% compared to the cost of the initial credit. Another example, provided by the insurance broker Magnolia, with a shorter loan: a loan of 200,000 euros over 15 years at the fixed rate of 1.05% contracted two years ago (April 2018). In the event of suspension of the maturities 6 months from May 1, 2020, the additional cost would amount to 1,049 euros on the whole of the credit.

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In addition to the cost of credit, there is the cost of loan insurance. “The deferral of repayments does not mean that the credit is interrupted as stated by Astrid Cousin, spokesperson for Magnolia. You must therefore be protected in this interval, because the amounts borrowed remain due.” If the borrower were to suffer a work stoppage, he must be covered, including during a repayment “break” period. Each month of deferral results in an additional monthly payment on the insurance. For an office executive paying 50 euros of insurance each month, the bill can quickly reach several hundred euros.

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Modulation an alternative solution

It will be understood, deferring your monthly payments at a cost which, in some cases, will not be painless. Modulating your repayment dates can therefore be a good alternative. Especially since this solution is provided for by almost all of the loan contracts distributed by banking establishments. The principle: the individual can lower their monthly payments up to 30%, for a minimum duration of twelve months. “It is possible to obtain six months, warns Sandrine Allonier, but it will be necessary to negotiate with her bank, and that will entail additional costs.” By taking the profile developed by Vousfinancer, a monthly payment lowered to 673 euros (-30%) for 12 months only results in an extension of 5 months (instead of 8 months in the event of extension of deadlines), and an additional cost in sharp decrease, to 1,040 euros. If the negotiation with the establishment has borne fruit and the customer obtains a modulation of six months, the additional cost increases to 520 euros. An option which there also turns out to be three times less expensive than the extension of maturity. The loan will also only be extended by 3 months.

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