Spread? 5 essential questions to negotiate it well
Index
1. What is the Spread?
Spread is basically an interest rate related cost (APR) but differs from all other costs in that it is a percentage defined individually by the bank, case by case, contract by contract, when granting a loan.
2. Can I Try to negotiate the Spread?
Of course, it is very common that you have to do it and you can do it at any time: before closing the loan or during it.
3. What is the Maximum Spread I Should Accept?
The amount of Spread considered fair, varies from period to period, and depends on each case, because it is related to the perception of risk that the bank makes of the loan you are asking for. Despite this, we currently advise you to try to negotiate the spread of your loan with your bank if it is above 1.4%.
But go prepared. First do a small market study: analyze the alternatives, comparing the other offers from other banks with the one you have today and show the bank that you know perfectly what the competition is offering.
4. What Factors Most Influence My Ability to Get a Good Spread Or Download It?
Try to put yourself for a moment in the place of a bench. What does any bank hate? Losing money. And when is the closest to losing money? When the risk is high. Therefore, your goal should be, on the one hand, to decrease the perception of risk and, on the other hand, to increase your negotiating capacity.
Strategies for Ease of Spread negotiation:
a) High initial entry: the higher the entry, the lower the amount of credit* the bank will have to grant, as well as the amount payable in monthly instalments, which reduces the bank’s risk and therefore increases its chances of approval and obtaining a reduced spread
*The maximum percentage of financing that you can ask the bank for is 90% of the final price of the house, i.e. if the house you are going to buy costs 250,000€, the bank can only finance up to 225,000€, the remaining 25,000€ will have to be the buyer to take over as initial down payment. Exception: in cases where the property belongs to the very institution that is granting the credit, it is possible to get a total financing of the house, without entering any initial amount
b) Bank guarantees to trade the spread
In addition to demonstrating to the bank that it has stable income, there are 2 more things to give the bank even more security:
- Presenting a guarantor
- 2nd mortgage on a property / land in your name free of charge as a mortgage
c) Cross-selling
It is very appreciated by the banks. Basically it consists in subscribing to other products of the bank in exchange for a reduction of the spread. The bank says to him: “Very well, we accept to reduce the spread, if in return to underwrite the credit card, domiciliary your salary, adopt a Retirement Savings Plan and life and multi-risk insurance of our bank.
This may be an important option, but before going ahead with it you should make a very strict analysis, checking if the charges you will have with these products are in fact less than what you will save by reducing the Spread.
We also advise you to look at the Annual Percentage Rate (APR) to compare the costs of home loans in different entities, since this rate represents the annual cost of a loan including all associated fees and expenses.
d) Sustainable Effort Rate
The effort rate, as the name indicates, serves to measure the effort each client will have to make monthly, taking into account their salary and expenses, to pay off the loan. Thus, the effort rate corresponds to the percentage of total income that a household will have to use to pay off the loan instalments contracted.
As a general rule, banks advise that their effort rate should not exceed 33% – ⅓ of household income – but in the case of home loans, they usually allow up to 40%.
The lower their effort rate, the greater their ability to negotiate the spread, since the perception of the probability of default is lower.
To calculate the Effort Rate you can make the following equation = [(Financial charges / total net household income) × 100] or download this simulator created by Comparajá.
e) Buy Bank Real Estate
There are several advantages of buying a house that belongs to the bank that will grant you housing credit – these are:
- possibility to get a 100% financing
- higher probability of obtaining a reduced spread
- Longer payment terms and sometimes a grace period
Factors Influencing the Bank's Risk Perception
a) Good credit history: if in the past you have made other loans in which you have met all the terms, without delay, this is a point in your favor
b) Positive balance: never has its account at zero or negative
c) Relationship with the bank: the better and more lasting your relationship with your bank (=) + probability of the bank feeling safe to deal with you
d) Constant income and stable professional situation: if you are already effective in your company and work there for several years, this will be something that will be valued by your bank, because it gives them a greater guarantee that even if interest rates rise, you will still be able to pay the loan
e) Age: Although this is not a variable over which you have great control, it is also an aspect taken into account by banks when granting credit for the purchase of your property. This is because the younger you are, the less (in theoretical terms) your financial availability, as well as your professional and salary stability, may make it a little difficult to get credit for housing.
The more checks you make on this list, the more likely you are to get a loan with a favorable spread.
5. What to do if the negotiation does not go as expected?
There are two possibilities:
H1 – If you are trying to renegotiate the spread with your bank, you can always consider transferring the credit to an institution with a better proposal. However, it is important to know that:
- You will have to notify the bank 10 working days in advance
- This transfer has costs: you will have to pay a commission to the bank, which may not exceed 0.5% of the capital that is reimbursed – in the case of variable rate contracts – and 2%, for fixed rate contracts
Thus, it may only pay to change banks if it is to reduce the spread considerably. If, for example, you only save 60 euros, you may not compensate.
H2 – If you are trading for the first time, it is to opt for another bank’s credit option
If you want to know more about the whole process of buying a house and what you should do after negotiating your spread, we suggest you read “Buying a property: a step-by-step guide”. If you want to see other news click here.
