In our rather difficult time, dealing with banks is becoming increasingly difficult, as they, in an attempt to control everyone and everything in their customer base, “push” some moral principles far into the background. But… Life is unpredictable, and sometimes financial difficulties or large purchases force us to take out a loan or mortgage. As a result, many people then face difficulties in repaying their debts. Then banks helpfully offer an option called loan extension.
What is a prolongation?
A rollover is an extension of the term of an existing loan with further financing. When the first fixed rate loan expires, the mortgage term also ends, and the remaining debt must be refinanced.
A loan extension works as follows: the current mortgage is extended for another year. The old contract remains in force with all the old terms, with two exceptions: the bank revises the loan rate, and you choose a new fixed interest rate (FA). There is usually a choice between 5, 10, 15 or 20 years.
After the interest rate on the current loan expires, the remaining debt is simply refinanced under new terms.
This way you remain loyal to your bank, but almost everything remains the same.
Advantages and disadvantages of prolongation
The biggest advantage of extending a loan is convenience. The institution sends a letter with a new offer on time, which you sign and send back. Simple, but there is a nuance: your home bank will only offer mediocre loans for extension. By switching to a new bank and reissuing your debt, you can often get better terms and save significantly.
Advantages
- It is done by letter, the contact persons remain the same.
- No additional documents
- No transition fees, no need to make an entry in the cadastre
Disadvantages
- Interest rates are often worse than in debt restructuring
- Old contractual terms must be adhered to
- Few opportunities for negotiations with the old bank
Risks of extension
No later than three months before the end of the first fixed interest rate period, the financial institution sends a letter notifying you whether it is ready to extend the mortgage.
As a rule, the institution is ready to extend the loan if the contractual relationship has not been burdened in recent years and the monthly payments have been made on time. Not only a letter of intent is sent, but also a new offer. However, there are cases when the bank does not want to extend the mortgage. Then it must also notify you in time so that there is enough time to find a new bank.
There is usually a date set until which the extension offer is valid, around 14 days. You have around two weeks to accept or reject the offer. When it is acceptable, simply tick the appropriate box and return the signed offer. Extensions are always made in writing, as a signature is required to extend the contract. After that, the financial institution will take care of the rest, there is nothing more to do. You will then receive written confirmation.
After accepting the extension offer, everything continues as usual: the remaining debt does not need to be transferred anywhere, it simply remains, and the institution will now debit your account with a new monthly payment. Since the contract is being extended, the loan does not need to be re-entered in the land register. This eliminates the need to contact a notary and further costs in the form of notary fees and fees for maintaining the cadastral register. Usually, there is no need to submit any additional documents, as well as conduct a new credit check, since the institution already knows your solvency.
Last but not least: the contact person remains the same for the following years. All these points make the extension a very easy option. But it has its risks.
Risks of extension
As convenient as rollovers may seem, they also have significant drawbacks: rollover interest rates are often relatively high and the framework conditions are inflexible. These disadvantages should be carefully considered before deciding in favor of this form of financing.
Convenience at the cost of higher interest rates
Typically, the extension offer from the previous bank is worse than similar offers from other banks from the point of view of the SC. Why doesn't the banking structure make greater concessions? Quite simply: they rely on convenience.
There are bureaucratic obstacles associated with switching to another provider, that is, with debt restructuring. For example, a new loan must be re-registered in the land cadastre, notary fees and fees for maintaining the land cadastre must be paid. A more favorable VS compensates for everything in the shortest possible time, but efforts remain. The banking institution understands everything well and speculates on your avoidance of unnecessary expenses. With a prolongation, you need to check the box and sign to complete the process. This advantage is so significant that the bank does not need to make the coefficient more attractive. At the same time, time is running out: the longer you remain passive, the more the financial institution benefits. After all, you will have to hurry to get and compare other offers. Many bank clients do not want to do this, and lose potential savings.
Time pressure often leads to bad decisions
The time constraint has other negative consequences: the long wait for a response from the bank leads to stress. The bank sends an offer only three months before the fixed rate expires - not a very long period. When the offer is not satisfactory, you will have to look for an alternative for further financing as soon as possible. This creates unnecessary pressure, which can lead to hasty wrong decisions, the consequences of which will be felt for many years.
Inflexible contract design limits
We remind you: a prolongation is an extension of the current contract. All contractual terms that existed before remain unchanged - with the exception of interest terms. In the event of a prolongation, no adjustments to other terms are provided. It is important to pay attention to the terms of the first contract. For example, the repayment rate was 1.0 percent, and it will remain at this level in the future. Previously, the loan was repaid quarterly - the financial institution will require the same frequency of payments under the new offer.
If there were certain options for unscheduled payments in the past, they will remain in force, but if there were none, then there will be none in the future. Simply put, any deviation from the terms of the contract (except for the interest terms) will no longer be a prolongation, but a new contract.
However, the old bank will not even offer you a new contract, as it would then be competing with itself. Perhaps you can change the somewhat rigid attitude by announcing that you are looking for a new supplier.
When should you use an extension?
Further financing always offers a unique opportunity to better position yourself with your own mortgage. Two factors determine how much you can get:
1. Market coefficient
Follow trends: If your current construction interest rate (in the case of a mortgage) has decreased since you first received financing, you can take advantage of this by reducing your monthly payment on your next financing. In this case, the term to full repayment will remain the same. Or, you can make a larger monthly payment, paying off the loan faster.
2. Own financial situation
Your income also usually changes over time: for example, if you earn more now or receive something as an inheritance, you may want to invest this money in a home loan, in which case you will need to change the repayment percentage.
In any case, extending the loan is not suitable: its rigid regulation does not allow for any room for maneuver to take advantage of new market situations or individual changes. Here you can only choose a new fixed mortgage rate. The following follows from this: an extension makes economic sense provided that neither the standard market mortgage rates nor your individual financial situation have changed since you took out the first mortgage.
How to avoid the need for an extension
To avoid the need to extend your loan, it is important to carefully plan your budget, taking into account even the smallest changes in income or expenses. The key point is not only to repay your debt on time, but also to create your own financial safety net, which will allow you to maintain stability even in the most difficult situations. In case of financial difficulties, do not be afraid to seek help from specialists or your lender to review the terms of the loan. They will help you avoid unnecessary expenses and provide the opportunity to continue payments without additional financial burdens. Timely response to a change in the situation is one of the main steps on the path to financial independence.
Conclusion
Loan extension may seem like a simple financial procedure, but its importance for many people is difficult to overestimate. Unforeseen circumstances occur in life, and it becomes the tool that allows you to buy time and avoid financial collapse. It allows the borrower not to lose the creditor's trust, preserve their financial reputation, and gradually restore stability.
It is important to remember: a prolongation is not only an extension of the repayment period, but also a chance to take control of one's obligations. It requires a conscious approach from the borrower: to contact the lender in a timely manner, assess one's capabilities, and, if necessary, change the terms of the contract. Sometimes it is even an incentive to rethink one's finances, review expenses, and learn financial discipline.
Extending the loan does not solve the problems forever, but it definitely helps to take the first step towards solving them. It is support in a difficult moment, which gives the feeling that there is always a way out. The main thing is to act responsibly, not to procrastinate and to consider this opportunity as a tool for temporary help, not a permanent solution.
