Until recently, switching from one bank to another cost a mortgage borrower an average of 400-600 euros. According to the conclusion of the Competition Council, these costs were a significant obstacle preventing consumers from switching from one credit provider to another. Now the situation has changed significantly – the consumer no longer has to waste time to re-credit from one bank to another, because the biggest work related to re-crediting is done by banks among themselves. In addition, now the consumer can perform all related actions – submitting an application, concluding a new contract and others – remotely.
The regulation applies to both bank and non-bank creditors
In order to reduce obstacles for consumers to refinance and apply the same legal regulation to all creditors, the new regulation applies to both bank and non-bank creditors. Therefore, in Latvia, providers of mortgage lending services and, therefore, mortgage refinancing services are credit institutions registered in Latvia, branches of credit institutions registered in other member states in Latvia, credit unions, as well as consumer lending service providers licensed in Latvia. In the recrediting process, all these service providers are obliged to cooperate and not delay the process. The entire recrediting process must be completed in no more than two months.
The new re-crediting procedure is also applicable to those mortgage loans that were initially taken out by one consumer, but, for example, due to marriage, partnership registration or another reason, the re-crediting application is already submitted to the “new bank” by two consumers. The main thing to observe is that at least one of the borrowers must remain the same as in the original loan agreement.
“Attention should be drawn to the fact that, as part of the recrediting process, the “new bank” is entitled to conclude a credit agreement with the consumer in the amount of the maximum outstanding balance. The previous creditor (“old bank”) informs it about this balance. Therefore, the legal regulation does not allow to increase the loan amount above the maximum balance of liabilities as part of the recrediting process. If the consumer wishes to borrow an additional amount, the creditor will be obliged to assess the consumer’s ability to repay the loan. The credit provider does not have such an obligation if the consumer’s monthly payment does not change or decreases during mortgage refinancing,” emphasizes Sigita Vāce-Vecvagare, senior lawyer at the WALLESS law firm.
Refinancing is not only easier, but also cheaper
Separately, the legislator has stipulated the applicable costs, compensations, their amounts and the legality of withholding related to recrediting. In general, it can be concluded that refinancing will now be not only easier for the consumer, but also cheaper:
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“Vecā banka” is not entitled to apply a fee for mortgage recrediting even in cases where it is stipulated in the mortgage lending agreement or the pledge agreement, nor is it entitled to demand that the consumer compensates it for any expenses incurred by it in connection with mortgage recrediting, except in the case when the loan has a fixed rate and the “old bank” is entitled to fair and objectively justified compensation for possible costs directly related to the early repayment of the loan.
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The fee for drawing up a new mortgage lending agreement or issuing a loan cannot exceed one percent of the amount of the new mortgage loan. Also, such a fee must not be higher than the fee that the new lender (“the new bank”) applies at the relevant time for issuing new mortgage loans not related to refinancing. The consumer has the right to divide this fee into three payments.
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If the “old bank” receives the real estate insurance compensation after having received the remaining payment from the “new bank” during the mortgage recrediting process, it is obliged to transfer it to the “new bank”. If the “new bank” receives a real estate insurance indemnity before the “old bank” has received the remaining settlement payment and does not issue a mortgage loan to the consumer, the “new bank” transfers the received insurance indemnity to the “old bank”.
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The consumer no longer has to pay a state fee for the registration of the lien in the land register in the amount of 0.1% of the transaction amount, as the lien is transferred without an increase in the transaction amount.
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The consumer may retain the obligation to perform a real estate appraisal. Although this requirement is no longer mandatory when refinancing, the “new bank” will be able to decide whether such an assessment is necessary or not. Each case will be evaluated individually.
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If the “old bank” requires the use of an escrow account for settlement with the “new bank” during the recrediting process, it does not have the right to demand a fee from the consumer for using the escrow account.
“Taking into account the simplified procedure of the mortgage recrediting process and the reduced costs, this could in the future promote both the desire of consumers to receive more favorable lending conditions and the mutual competition of lenders. All the more so because the entire recrediting process can be implemented remotely. The consumer can remotely examine the new lender’s offer, conclude the new loan and pledge agreement, as well as remotely certify the signature confirmation request at a sworn notary,” says S. Vāce-Vecvagare
8 steps to refinance a mortgage loan
1. Submitting an application to the “new bank”: a consumer who has a mortgage loan in the “old bank” and wishes to transfer credit to a “new bank” submits an application to the “new bank” expressing the desire to transfer credit.
2. Application & offer: “new bank” evaluates the consumer’s application and makes an offer to the consumer.
3. Customer “retention” offer: The “new bank” informs the “old bank” and requests the necessary information in the recrediting process. “Vecā banka” can prepare and make a “retention” offer to the client. If the consumer accepts the “hold” offer, the recrediting process ends at this stage. Regardless of whether the ‘old bank’ tries to retain the customer or not, the ‘old bank’ must provide the requested information within 10 business days or refuse to provide the information, indicating that the consumer has accepted the ‘retention’ offer.
4. New mortgage loan and pledge agreement: when the “new bank” has all the necessary information, it concludes a new mortgage lending agreement with the consumer in the amount of the maximum liability balance, as well as simultaneously concludes a new mortgage agreement and other necessary agreements (for example, insurance).
5. Obligation of “Vecās banka” in connection with conversion of mortgage right: The “new bank” informs the “old bank” about the initiation of the pledge conversion process. “Vecajai banka” is obliged to give consent to the transfer of the lien and the related prohibition sign within 3 working days. This consent must be given to a sworn notary on the website of the Latvian Council of Sworn Notaries.
6. Obligation of “Jaunas banka” in connection with conversion of pledge right: The “new bank” also submits a notice to a sworn notary about the lien (which has been secured in favor of the “old bank”) and the related prohibition notice. The notification together with the attached documents, including an unsigned confirmation request, is submitted on the website of the Council of Sworn Notaries of Latvia.
7. Obligation of the pledger (consumer) in connection with the conversion of the pledge: the consumer, who is the mortgagor, under the signature of a sworn notary and a sworn notary certifies the mortgagor’s confirmation request to carry out the pledge and the related prohibition sign in the land register in favor of the “new bank”.
8. Completion of mortgage conversion and entry in the land register: after the conversion of the lien in the land registry in favor of the “new bank”, mutual settlements between the two lenders take place. If, for some reason, the “new bank” does not settle with the “old bank”, the latter has the right to ask the Land Registry to restore the lien in the same condition as it was before, but this requires a written agreement of all parties. If such an agreement cannot be reached, the “old bank” has the right to apply to the court in the general action procedure.
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