Renegotiating with your bank or refinancing elsewhere

A borrower with €148,000 of capital outstanding over fifteen years receives two proposals: their own bank agrees to lower the rate, a competitor offers to refinance the loan. The first costs amendment fees, the second an exit charge and new security costs. The two are compared on total cost, never on the monthly payment.

Two routes to the same end

Renegotiating means changing the existing loan with the bank that granted it. The contract is not replaced: an amendment changes its terms, most often the rate and sometimes the term, and the loan continues under the same number.

Refinancing means having another lender fund the outstanding balance, which is then repaid early. The original loan is extinguished and a new contract replaces it, with its own security and its own insurance.

The original bank is under no duty to agree to a renegotiation. It agrees where it would rather keep the customer at a lower rate than lose them, which assumes the threat of leaving is credible and documented.

That is why the two steps are taken in this order: first obtain a quantified refinancing offer elsewhere, then put it to your own bank. Asking for a reduction with no alternative in hand rarely succeeds and commits the lender to nothing.

A renegotiation accepted does not oblige you to give up refinancing. The borrower then compares two complete proposals, fees included, and keeps the one whose remaining total cost is lower, with no regard to loyalty.

That comparison means asking each of them for the same document: a full repayment schedule for the loan proposed. It is the only paper that allows the remaining interest to be added up at all, and it is also the one obtained least readily of any.

What each route costs

Renegotiation carries amendment fees, generally modest and negotiable, sometimes expressed as a percentage of the capital outstanding. The original security stays in place, which is its main economic advantage.

Refinancing, by contrast, stacks three items: the early repayment charge owed to the old bank, the arrangement fee of the new loan, and the cost of new security, a mortgage or a guarantee depending on the lender.

Those security costs are the item most often left out of comparisons. They do not appear on a rate proposal and surface only in the loan offer, at a point when the decision has psychologically already been taken.

In return, refinancing is a chance to change borrower's insurance, often the largest source of saving on older loans. Renegotiation allows it too, but substituting insurance is in any case handled independently of both routes.

• Renegotiation: amendment fees, original security kept in place
• Refinancing: exit charge, arrangement fee, new security to create
• In both cases: ask for a full repayment schedule
• In both cases: borrower's insurance is changed independently

Compare on total cost, not on the monthly payment

A proposal that lowers the monthly payment is not necessarily cheaper. Extending the term reduces the instalment and increases total interest, so that a borrower relieved every month pays more over the life of the loan.

The indicator that decides is the remaining total cost: the sum of instalments to come, plus every fee of the operation, set against the same sum on the current loan. One number on each side, and the decision becomes obvious.

That computation needs the repayment schedule, and nothing else. It requires neither a sophisticated spreadsheet nor outside advice: adding a column is enough, and that is precisely what a sales presentation avoids doing for you.

An operation that shortens the term at a constant instalment often produces the best result. It is rarely proposed unprompted, because it offers no visible immediate gain, while it concentrates most of the saving.

Choosing between lowering the instalment and shortening the term is therefore a cash trade-off, not a technical question. Putting it explicitly avoids accepting the one the proposal received had already settled for you.