Renegotiation and early repayment of mortgages

The life of a mortgage is not a long, quiet river. A significant fall in market interest rates, a marked improvement in your financial situation or, on the contrary, temporary difficulties may lead you to consider changing your initial loan contract. Fortunately, the legal framework provides mechanisms for adapting your credit to life's ups and downs: renegotiation and early repayment. What options are available to you, and what legal precautions need to be taken to navigate these processes? This article details the conditions, formalities and essential points to watch out for.

Renegotiating a credit agreement: conditions and formalities

Renegotiating a mortgage means changing some of its initial terms without terminating the contract. The adjustments most often concern the interest rate, in order to take advantage of more favourable market conditions, but may also concern the term of the loan or the amount of the instalments to adapt to a new repayment capacity.

Contrary to popular belief, the formalities required for renegotiation are relatively straightforward. Article L. 313-39 of the French Consumer Code, which resulted from the reform of home loans, clarifies this point: "In the event of loan renegotiation, changes to the initial credit agreement are made solely in the form of an amendment drawn up on paper or on another durable medium". It is therefore not necessary to issue a complete new loan offer, as was the case before certain reforms.

However, this rider is not just a formality. It must contain precise information to ensure that you are kept informed and give your informed consent:

• A depreciation schedule updated, detailing for each future instalment the breakdown between capital repaid and interest, as well as the capital remaining due in the event of a new early repayment.
• Le annual percentage rate of charge (APR) recalculated on the basis of future instalments and charges only.
• Le total cost of credit recalculated, also based on future maturities and costs.
• For variable-rate or adjustable-rate loans, the rider must also specify the terms and conditions for rate changes applicable for the remainder of the contract.

Once you receive this rider containing all the required information, the law gives you a an incompressible ten-day cooling-off period. You cannot accept the amendment until this period has expired. Acceptance must be formalised by letter (postmarked) or by any other means agreed with the lender that allows your acceptance to be dated with certainty.

It is essential to stress the importance of this formality. Failure to include the obligatory information in the amendment or to observe the cooling-off period may invalidate the renegotiation. The Court of Cassation has confirmed the need to comply with these requirements (for example, Civ. 1re, 5 February 2020, no. 18-26.769, which, although ruling on a technical detail, reiterates the importance of the legal framework for the amendment). If the formal requirements are not complied with, the original terms and conditions of the loan may continue to apply, or the very validity of the renegotiation may be challenged.

It is important to note that renegotiation, formalised by a simple rider, does not entail novation (creation of a new debt that extinguishes the old one). The original guarantees (mortgage, surety) attached to the initial loan therefore remain in place, unless expressly stated otherwise in the rider.

Early repayment: a fundamental right for borrowers

Early repayment allows you to repay all or part of the outstanding capital on your mortgage before the due date. This is a fundamental right that is recognised and protected by law. Article L. 313-47 of the French Consumer Code is very clear on this point: no contractual clause can prevent you from making an early repayment, whether total or partial.

You can exercise this right at any time during the life of the loan. There may be a variety of reasons for doing so: unexpected income (inheritance, sale of another property), a desire to reduce the total cost of the loan or shorten the repayment period.

There is an important distinction between the type of rate on your loan:

• For variable-rate loans : Early repayment is totally free. The lender cannot claim any compensation from you.
• For fixed-rate loans : The lending institution is entitled to demand a compensatory allowancecalled Indemnité de Remboursement Anticipé (IRA). The purpose of this indemnity is to compensate the bank for its loss of income, as it will not receive the interest originally planned for the remaining term. However, this indemnity is strictly regulated.

The procedure for making an early repayment is generally straightforward. You must notify your bank of your intention, usually by registered letter with acknowledgement of receipt, specifying the amount you wish to repay (in full or in part) and the desired date for the operation. The bank then has a period of time, often one month, in which to provide you with a precise breakdown of the sums owed (outstanding capital, accrued interest and any compensation).

Since Order no. 2016-351, the lender also has an increased obligation to provide information. If you inform them of your intention to make an early repayment, they must provide you without delay, on paper or in a durable medium, with the information needed to assess this option. This information must quantify the impact of the repayment on your obligations, specify the amount of any compensation and indicate the assumptions used for this calculation (article L. 313-48 of the French Consumer Code).

Early repayment indemnity (IRA): ceilings and conditions for exemption

The Early Repayment Charge (IRA) that the lender can claim in the event of repayment of a fixed-rate loan is strictly limited by law to protect the borrower. Article R. 313-25 of the French Consumer Code sets a twofold limit, as follows the lower of the two amounts which applies :

1. Compensation may not exceed six months' interest on the capital repaid early, calculated at the average rate for the loan.
2. Compensation may not exceed 3% of outstanding capital before early redemption.

Let's take a concrete example: you want to repay early the outstanding capital of €150,000 on a fixed-rate mortgage at 1.5%.

• Calculation 1 (six months' interest): (€150,000 * 1.5%) / 2 = €1,125
• Calculation 2 (3% of outstanding capital): €150,000 * 3% = €4,500

In this example, the maximum compensation that the bank could claim from you would be €1,125, as this is the lower of the two ceilings.

It is crucial to check the calculation provided by your bank. Some banks sometimes try to apply unjustified charges or exceed the legal limits.

IRA exemption cases

In certain specific situations, as set out in article L. 313-48 of the French Consumer Code, no early repayment penalty may be claimed by the lendereven for a fixed-rate loan. This is the case when the repayment is motivated by :

• La sale of the property following a change of place of work the borrower or the borrower's spouse.
• Le death the borrower or the borrower's spouse.
• La forced cessation of professional activity (redundancy, for example) of the borrower or his/her spouse.

To benefit from this exemption, you will need to provide the appropriate supporting documents to your bank (employer's certificate, death certificate, Pôle Emploi certificate, etc.).

Prohibited or unfair clauses relating to early repayment

As the right to early repayment is a matter of public policy, any clause that seeks to restrict it or make it more costly than provided for by law is likely to be considered unfair and therefore deemed unwritten. Be particularly wary of clauses that :

• Limit the possibility of early repayment to certain specific periods of the year.
• Impose an unreasonably long notice period to notify your intention to repay (beyond what is necessary for the bank's calculations).
• Provide for specific penalties or administration fees in the event of early repayment, in addition to the legally capped IRA.
• Attempting to circumvent IRA ceilings through indirect mechanisms or unjustified ancillary charges.

Case law has repeatedly confirmed that this right is a matter of public policy, and has punished attempts by banks to circumvent it (see, for example, the former decision Civ. 1re, 2 December 1992, no. 90-20.712, which already established this principle).

It should be noted that for loans taken out before 1 July 2016 (when many of the provisions of the 2016 Ordinance came into force), certain rules, particularly on the information to be provided by the lender, may have been slightly different. If you are in any doubt about an old contract, we recommend that you have it analysed by a professional.

The issue of judicial review of the IRA

Article L. 313-47 of the Consumer Code makes express reference to article 1231-5 of the Civil Code (formerly article 1152), which allows a judge to moderate or increase a penalty clause if it is manifestly excessive or derisory. This might suggest that a judge could reduce an IRA, even if it complies with the legal ceilings, if it appeared to be "manifestly excessive" in relation to the actual loss suffered by the bank.

However, the case law of the Cour de cassation is consistent and restrictive on this point. It considers that the IRA, which is already legally capped, does not constitute a penalty clause in the strict sense and that the judge does not have the power to reduce it if it complies with the limits set by article R. 313-25 (see, for example, Civ. 1re, 11 October 1994, which already refused moderation). The underlying logic is that the legal ceiling is supposed to represent an acceptable balance between the borrower's right and the compensation owed to the lender. It is therefore very unlikely to obtain a judicial reduction of an IRA if it is correctly calculated within the legal limits.

Practical and strategic aspects of early repayment

Beyond the purely legal aspects, early repayment raises practical and strategic questions:

• Formalities : Prepare the necessary documents: a reasoned written request (if you are seeking exemption from the IRA), proof of the origin of the funds (for anti-money laundering purposes), proof of identity and, if applicable, the bank details of the account to be debited for the fees (note that only the fees for releasing the mortgage in the event of full repayment are legitimate, not the "handling fees" for the repayment itself).
• Bank statement : Carefully check the statement provided by the bank: the capital outstanding is correct, the IRA is calculated in accordance with the ceilings, and the interest accrued since the last repayment is taken into account.
• Partial refund : If you opt for partial repayment, a strategic question arises: should you request a reduction in the remaining term of the loan (which lowers the total cost) or a reduction in the amount of the monthly repayments (which eases the monthly burden)? The bank should present you with both options in a new schedule.
• Tax impact : For rental investments, early repayment may affect your tax position (less interest deductible). A tax analysis may be useful before making your decision.
• Release of mortgage : In the event of full early repayment, if your loan was secured by a mortgage, you will have to pay the costs of releasing the property from the mortgage (notarial deed).

Renegotiation and early repayment are valuable tools for adapting your mortgage to changes in your circumstances. Understanding the legal framework and the financial implications is essential if you are to make the wisest choices. The potential complexity of these operations, particularly in the face of the sometimes reluctant practices of banking institutions, often warrants support.

Navigating the intricacies of mortgages, whether for renegotiation or early repayment, requires a good understanding of mortgage reform and your rights. If you are considering one of these options or are experiencing difficulties with your bank, our lawyers advise you on mortgages to analyse your contract and defend your best interests.

Sources

• Consumer Code: articles L. 313-39 (Renegotiation), L. 313-47, L. 313-48 (Early repayment), R. 313-25 (IRA ceilings)
• Civil Code: article 1231-5 (Former article 1152 - Judicial review)
• Court of Cassation, Civil Division 1, 5 February 2020, no. 18-26.769 (Formal amendment)
• Court of Cassation, Civil Division 1, 2 December 1992, No. 90-20.712 (Public policy nature of early repayment)
• Cour de cassation, Civil Division 1, 11 October 1994 (Non-judicial review of capped IRA)
• Order no. 2016-351 of 25 March 2016 on consumer credit agreements relating to immovable property for residential use