The smoothing of home loan is proposed to the borrowers having recourse to several credits of unequal durations.
The formula applies to create several levels of repayment in order to reduce the monthly payment in the first years and the impact of the loans at reduced rates whose durations are generally shorter than the principal loan.
This arrangement is similar to “tailor-made” because the bank establishes a simulated as well as possible to adapt the monthly payment of the borrower to his financial situation and avoid the sometimes very high variations between the different periods.
These different reimbursement levels make it possible to obtain a single, lower monthly payment.
It should be noted that the recent relaxation of reimbursement makes the impact of smoothing less obvious, as you will see in our quantified example.
Can we smooth personal credits?
Three scenarios can be considered if you have one or more consumer credit outstanding.
Solution with smoothing
The technique is the same as that used with several mortgage loans, the monthly payment of the main loan is lowered to allow the borrower to finish repaying his consumer loans.
Note that in practice, no bank accepts to use smoothing when there are several personal loans.
Please note: the credit organizations that offer tiered loans including a consumer loan are not legion. Some of them, like Good Credit, do so partially and under conditions.
Keep the consumer loan and renegotiate it if necessary
If your debt ratio allows, you can very well keep the current credit and let it run until its term. In any case, this is the solution to choose, especially when there are only two or three months left to reimburse. If this is not possible, you can try a renegotiation and ask for an extension of the duration of the consumer loan to lower the monthly payment and obtain a debt ratio below 33%.
Settle the remaining capital due before presenting the file
A simple solution is to reimburse the capital remaining due to a portion of his personal contribution. This solution, when possible, has a double impact.
- Lower the debt ratio, which increases borrowing capacity in greater proportions than if the contribution were used as such.
- Improve the quality of the file and therefore allow better negotiation of rate conditions.
Important: before using such techniques, you must always assess the impact that a smoothed loan can have on the monthly payment. This is why it is always necessary to make several simulations in order to determine the best financing study.
Simulation of a smoothed loan
Take the example of a borrower who uses 3 loans to finance a real estate project.
- Zero rate loan: $ 80,000 over 20 years with no deferred repayment
- Housing Action Loan: $ 10,000 over 10 years at a rate of 1.5%
- Main loan: $ 124,000 over 25 years at a fixed rate of 1.88%.
These rates are given excluding insurance.
A monthly payment of $ 942 can pose a debt problem in the first years, while after 10 years the effort will be less and after 20 years it will have dropped by more than $ 400. On the other hand, if a financing study is carried out with a tiered loan , the borrower will have only one lower monthly payment of $ 879.
As expected the difference is not very large and there is reason to wonder here if the smoothing is a real advantage. In some cases, reducing the monthly payment by $ 63 can keep the debt ratio below the maximum threshold. In many others, it is best to leave the financing plan as it is.
Advantages and disadvantages
Other examples show the advantage of using smoothing, especially when subsidized loans are repaid over a very short period or when there is a consumer loan to integrate.
On the other hand, it makes it possible to obtain a constant monthly payment throughout the duration. On the other hand, this harmonization of reimbursements simplifies budget management.
The major drawback is that this technique involves an additional cost due to the lower amortization of the main loan. The higher the amount, the higher the cost. A technique to be used only in case of debt greater than 33% or insufficient living space. Articles that might interest you.