Reduction of the outstanding principal

This is a reduction of the outstanding debt, which means that the amount of the new instalments is lower than the original amount.

This measure is not obligatory for the institution, which may accept or reject it without having to justify its decision.

Debt reduction can be applied when the restructuring plan is unfeasible. Remember that this occurs if the debtor meets the so-called "exclusion threshold" and the purchase price of the main residence meets the limit, but the resulting instalment of the restructuring plan exceeds 50% of the family unit's income.

There is no time limit for requesting the debt reduction, which can be requested even if the bank has initiated foreclosure proceedings and the auction has been announced.

The bank must respond to the debt reduction request within one month of the bank's confirmation of the restructuring plan’s unfeasibility.

In order to calculate the debt reduction, the institution will have to use one of the following methods:

  • 25% reduction of the outstanding principal.
  • Reduction equivalent to the difference between the repaid principal and the principal which bears the same proportion to the total principal loaned as the number of instalments paid by the debtor to the total instalments due.

    • If we have a mortgage loan with the following data:

      - total number of instalments to be paid: 150

      - no. of instalments paid: 45

      - principal outstanding: 80,000

      We calculate the percentage of the debt reduction with respect to the outstanding principal (instalments paid/total instalments):

      45 / 150 = 0.3 = 30%

      We apply this percentage to the outstanding principal:

      0.3 * 80,000 = 24,000 reduction

  • Reduction equivalent to half the difference between the current value of the house and the value resulting from subtracting from the initial appraisal value double the difference between the initial appraisal and the loan granted, provided that the former is lower than the latter.

    • If we have a mortgage loan with the following data:

      - Initial appraisal value: 150,000

      - Amount of the loan granted: 120,000

      - Current value of the home (current appraisal): 100,000

      - Principal outstanding: 75,000

       

      We calculate double the difference between the initial appraisal and the loan granted:

      150,000 - 120,000 = 30,000 (difference between the initial appraisal and the loan granted)

      30,000 * 2 = 60,000 (we calculate double the difference)

      150,000 - 60,000 = 90,000 (we subtract the above result from the initial appraisal)

      Indeed, we see that 90,000 is lower than the current value of the home (100,000).

       

      We calculate half of the difference between the current value of the home and the previous value:

      100,000 - 90,000 = 10,000

      10,000 / 2 = 5,000 reduction

 

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