3. Types of French Mortgage Credit
International buyers may only be accustomed to conventional loan guarantees, but in France there are three different forms of security, or charge, which may be offered against a loan.
- Conventional Charge
- Priority Lien Charge
- Institutional Guarantee
While the use of a conventional mortgage might be more readily understood and used by international buyers, 'institutional guarantees' are widely used in France, mainly because the arrangement and legal fees are generally lower than a mortgage.
Unfortunately, these institutional guarantees are only available if you are fiscally resident in France, but as we know an increasing number of you rent in France before you buy, it may be of interest to first time international buyers as well as existing residents wanting funds for home improvement.
3.1. Conventional French Mortgage Charge - Hypothèque
A conventional mortgage charge is called a hypothèque conventionelle.
The legal process of mortgage registration is undertaken by a notaire, and their fees are around 2% of the loan amount.
There are also likely to be additional arrangement fees from the broker or lender.
So the transaction costs of a conventional mortgage are high if it is not used for the full period of the mortgage.
In the event of sale of the property and reimbursement of the debt before the expiry period of the loan it is necessary for the mortgagee to pay for the redemption of the mortgage, a process called mainlévée.
This process has to be undertaken through a notaire with legal costs in the region of 0.5% of the loan, depending on total amount borrowed.
If the loan is ordinarily repaid in the normal manner, and the property remains in the same ownership, then the mortgage is automatically discharged after two years and no fees are payable.
3.2. Priority Lien Charge - Hypothéque de privilège de prêteur de deniers
The origins of this type of security go back to the middle ages, hence the strange name given to it of hypothéque de privilège de prêteur de deniers.
The distinguishing features of the mortgage are that it takes priority over all other charges on a property, it is cheaper than a conventional mortgage, and it is only available for an older, existing property.
So it cannot be used for off-plan sales, improvement or conversion works, or for the construction of a new house.
It is the mortgage of first choice by the French as it is cheaper than a conventional mortgage. However, on the downside, 'equity withdrawal' mortgages are not possible with this type of mortgage. Thus, if you wanted to borrow more against the value of your property to carry out improvement works, you would need to change to a conventional mortgage.
As with a conventional mortgage the legal process is undertaken by a notaire, but the fees are less (about 1%) as there is no requirement to pay stamp duty, called publicité fonciere.
It is also possible to obtain this mortgage on a term of up to 50 years, higher than the normal maximum of 35 years for a conventional mortgage.
The mortgage charge is registered on the property in the same way as a conventional mortgage and will take priority over all over mortgages on a property.
As with a conventional mortgage above, it is also necesssary to pay for the release of the mortgage charge once the loan is repayed, or allow it to lapse after two years.
The usual broker/lender arrangement fees are payable.
3.3. Institutional French Mortgage Guarantees
In order to reduce transactions costs to borrowers the banks have created an alternative to a mortgage, through the use of an institutional guarantee distributed by mutual organisations.
Institutional guarantees are called la société de cautionnement. They operate on the simple basis of the mutualisation of risk between the lenders.
The guarantee is available for new or older properties but, as a general rule, it is only available to those with a good credit record and a stable income.
It is also only available if you are fiscally resident in France.
Under the system, the mutual funder acts as a guarantor in the event of default by the borrower on their loan. In turn, the borrower pays the funder a fee that is proportional to the size of the loan.
So there is no charge placed on the property by the lender, and no legal mortgage registration costs to pay.
However, this does not imply that your house is not at risk if you do not make the payments, for the lender can ultimately seek debt recovery in the courts and enforce the sale of your property if you do not pay.
The fee structure varies as between the lenders but it is not usual for it to be in two parts – a fee for the guarantee, which is 75% reimbursable when the loan is repaid, and an arrangement fee that is retained by the guarantor.
The fee for the guarantee is about 1.5%-2% of the loan and the arrangement fee varies around 0.5% of the loan.
Thus, on a loan of €120,000, the initial fee might be in the order of €2000, made up of an arrangement fee of €750 and a fee for the guarantee of €1250.
The former is retained by the lender and the latter is reimbursable at the end of the mortgage at the rate of 75%. This would give net fees of around €1000.
In some cases the fee is not reimbursable, but in these cases the initial initial fee payable will be lower, e.g. 1%.
The use of institutional guarantees is normally a quicker procedure than a mortgage, both in the purchase and sale procedures, as there is no need to go through the mortgage registration process.
It is also particularly useful for loans of short duration, as there are no costs to pay in redeeming a mortgage.
Perhaps the largest organisation specialising in such guarantees is Le Crédit Logement, which is funded by most of the major banks.
Other mutual lenders have the acronyms SACCEF and CNP. Some major banks also have their own guarantor: CAMCA (Crédit agricole), CMH (Crédit mutuel) and SOCAMI/SOPACEF (Banques populaires).
Alternatively, visit your local bank and ask them about such a loan.
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