Property Financing

The main reason for a non French resident to take out a mortgage through us in a French bank is the French Inheritance Tax (up to 40% of the capital share in the property) and Wealth Tax. To help avoid these taxes a mortgage of 80% is taken out in France, thereby reducing the wealth and also the base for the inheritance tax.

You can choose between a normal repayment mortgage or an interest only mortgage, in any case the interest rate offered to foreigners in France are quite low compared to the European average.

Credit institutions granting real-estate loans are exposed to a significant risk of the borrower defaulting on the loan in view of the large amounts of money involved and the length of the repayment period (max 30 years). It is understandable that these institutions should require guarantees to ensure the debt assumed by the borrower is repaid in full.

THERE ARE TWO PRINCIPAL TYPES OF GUARANTEE:

collateral in the form of real property belonging to the borrower pledged as security, and surety agreements involving a guarantor who will pay the borrower’s debts in the event of default. Various other arrangements also enable lending institutions to guarantee the loans they grant to borrowers.

Collateral security takes two distinct forms: mortgages and moneylender’s priority liens.

A mortgage can be used to guarantee all types of real-estate transaction. Several mortgages may be taken out for the same property provided the sum of the mortgages does not exceed the total value of the underlying assets.

The priority lien is not available for all types of loan: it is essential that the real estate financed should already exist at the time the guarantee is taken out.

Consequently, real-estate transactions involving homes purchased from plan, the construction of a private house or renovation work is excluded from this type of guarantee.

Guarantees in the form of collateral continue to exist for a period of two years after the payment of the final instalment of the loan they were taken out to secure, and only automatically lapse at the end of this period.

As a result, if the borrower wants to sell his property before the end of this two-year period he must release the mortgage, an operation that incurs expenses for the seller.

The mortgage release operation requires a deed executed and authenticated by a notary and leads to expenses consisting of the notary’s fees, the salary of the registrar of mortgages (0.10% of the sums concerned by the entry of satisfaction of mortgage) and stamp duty.

SURETY AGREEMENTS:

The principle of surety is based on the intervention of a third party (the guarantor) who undertakes to repay any outstanding debt should the borrower default. Unlike the conventional mortgage or priority lien, it is not necessary to have the surety agreement authenticated by a notary and the cost of the surety is not regulated.

Depending on the institution providing security, expenses related to surety agreement amount to approximately 1% of the loan. Surety agreements offer considerable flexibility should the borrower decide to sell his property. Unlike collateral security, no mortgage release procedure is required should the real estate be sold before the end of the loan period.

The surety lapses automatically with the payment of the final loan instalment even in the case of early repayment of the loan.

Another advantage consists in the fact that the borrower, in the event of financial difficulties, can sell his property by his own means in order to reimburse his debt, without being subject to the results of a judicial sale. In terms of cost, surety agreements are not less expensive than collateral security and may be more expensive than a priority lien.

OTHER TYPES OF GUARANTEES:

For certain type of borrowers and certain types of real-estate operations, financial institutions may accept stocks and shares owned by the borrower as security for a loan.

The operation consists in pledging securities to the lending institution that will retain them in the event of a permanent default on the part of the borrower.

Depending on the type of securities, the bank will change the coverage rate for the pledged securities. Thus, for shares whose value can fluctuate considerably, credit institutions may require that the value of the pledge portfolio should be at least equal to 150% of the loan granted.

Please email at: n.pasquier@agencemercure.com