The modularity of the loan is a term which is certainly unknown to you today. It is however recommended to know it and to add this clause in your mortgage contract, because it could one day allow you to save money.
It is a question of having the possibility of modifying your repayment monthly payments, by increasing them for example. Thus, therefore, the duration of your credit will be decreased.
As a reminder, your loan is made up of three elements: the capital borrowed, interest on repayment and loan insurance. If you decide to increase your monthly payments and therefore repay your credit faster with your bank, then you will pay less interest, and less loan insurance, and you will therefore save money. This is called the modularity of the loan.
Increasing your monthly payments allows you to pay off your loan faster
Can we increase or decrease the monthly payments?
The borrowers mainly use the modularity of the monthly payments when they wish to increase them. This allows them to repay faster and thus reduce the cost of their mortgage.
On the other hand, it is complicated to ask to reduce them with one exception: by reducing the monthly payments, you extend the duration of your loan. The banks accept with a limit: the credit must not be extended for a duration greater than 2 years. If the borrower asks his bank to lower his monthly payments by increasing the remaining term by more than 2 years, it would then be a debt restructuring. This therefore no longer falls within the scope of loan modularity.
Lite Lender tip # 1!
- In a period of low rates, it is not worth repaying your loan faster. Indeed, some borrowers only look at the cost of credit. It is a mistake. It is often more profitable to keep your credit and invest your savings. Even at an equivalent rate, it’s more profitable. This is called leverage. We will come back to this term in a future article.
Lite Lender Tip # 2!
- In a period of low interest rates, always favor the modularity of the loan over prepayment. This will allow you to keep your savings paid and thus it will be more profitable for you.
Finally, it is entirely possible to reverse your decision to increase your monthly payments: let us admit that you have decided to increase your monthly payments but that a few years later, you realize that the amount reimbursed initially suited you better. In this case, it is possible to reduce the monthly payments to find the monthly amount to be reimbursed, initially provided for in your mortgage loan contract.
TO REMEMBER !
- Include this clause in your contract
- Increase your monthly payments allows you to reduce the duration of your loan
- You can always return to your previous situation if it no longer suits you
We will see in a next article the advantages and disadvantages of the modularity of the loan.