It is common to buy real estate using several types of bank loans, such as an assisted loan, a zero-interest loan or even a traditional mortgage.
The problem is that these different loans do not have the same rate or the same duration. So that the borrower benefits from a homogeneous monthly payment, we then proceed with the smoothing of the mortgage loan, also called tiered loan or nesting loan.
Definition of mortgage smoothing
Mortgage loan smoothing is a financial arrangement technique used by banking institutions to allow the borrower to benefit from reduced monthly loan payments. It consists of grouping together several mortgage loans to finance a single property. Smoothing out his mortgage avoids creating an imbalance between high repayments at the start of the loan and relatively low repayments at the end of the loan, so that the borrower always pays the same monthly payment, without sacrificing his purchasing power .
How does mortgage smoothing work?
Imagine nesting tables or scattered Russian dolls. When you put them away, each one fits together to create a single unit. It is the same principle for loan smoothing, which we understand better the term “nesting loan”. Moreover, the term “interlocking credit” is democratizing to be more meaningful.
So, if you have one or more loans in addition to your main mortgage, they are offered at different rates and terms. The smoothing makes it possible to adapt the principal loan, which will be the subject of a lower repayment than the other loans at the beginning of the loan, so as to always pay a single monthly payment. In the end, there will only be the principal loan left to repay, but your monthly payments will remain unchanged.
What are the advantages of the smoothed loan?
The advantages of loan smoothing are numerous, but it is important to weigh the pros and cons before deciding. The banking establishment or your broker must be able to give you simulations with smoothing over different loan durations, so that you can objectively make the choice to opt for the most appropriate solution for your budget and your project. immovable.
Smoothing to reduce the amount of monthly payments
This is the objective sought by the majority of first-time buyers or low-income households. Reducing the amount of monthly payments means that the loan will be taken out over a longer period, and therefore will inevitably be more expensive. In return for this effort, a smoothed loan with reduced maturities makes it possible to increase the amount of the loan to benefit from housing that meets the expectations and needs of the borrower.
Here, the reduction in the monthly principal mortgage loan payments generally lasts as long as the PTZ (Zero Rate Loan) has not finished repaying. It can also be an aid loan such as the home equity loan or these two types of combined credits. As for the principal home loan, its repayment amount grows as time passes, until it is the last loan to be repaid.
Smoothing to reduce monthly payments while maintaining the same duration
While the first option lengthened the duration of your mortgage loans, the smoothing solution that we offer you here allows you to keep your loan over the initial planned duration. It is the hybrid solution most often chosen by households who want a balance between the amount of monthly payments and comfort of life.
Here, the main home loan will also see its maturities reduced as long as the side loan (s) are in place, but to a lesser extent. This allows more capital to be repaid from the start of the loan. In the end, the reduction in monthly payments is intermediate, like the final cost of the loan.
Smoothing to reduce the overall duration of the loan
The smoothing of loans with reduction of the total credit term is common. Here, the borrower pays the same amount each month through the tiered system, but begins repaying all loans taken out as soon as repayments begin.
As a result, the monthly payment is increased, the loan period shortened and its final cost reduced. This is the most relevant solution from a financial point of view, but it implies having sufficient repayment capacities, to keep a living amount viable for the household. This is where the bank calculates your debt ratio, which must not exceed 33%.
Smoothed loan and borrower insurance
Mortgage loan insurance can be taken out directly with the bank via so-called group insurance, or by delegation of insurance via a so-called individual contract, with a third party organization. Whether you have one or more home loans, whether your loan is smoothed or not, your rights are not affected. Indeed, borrower insurance covers the risk of disability, incapacity or death of the borrower for a specific property, so you have the free choice of insurer.
How to take out a nesting loan at the best rate?
Loan smoothing is a financial technique that is spreading more and more, even if it is little used or at least offered by banks because of the complexity associated with setting up the file. In practice, and unless you insist, the pull-out loan is only used in the context of a principal mortgage / zero rate loan coupling.
To benefit from a loan smoothing with several conventional loans of different durations, we advise you to use the service of a mortgage broker. It is worth it when bank interest rates are high. However, in the current context where borrowing rates are at their lowest, we encourage you to compare for yourself the proposals made by the banks.