The bank that grants a mortgage is taking a risk. To protect itself, it requires a financial guarantee. This guarantee consists of taking "security" arrangements to protect against a possible default on the repayment of the borrower. This can be a deposit, a mortgage (when the loan is intended to finance the property construction) or even a lender's privilege (when the loan is intended for the acquisition of the property).
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The privilege of lender’s money, which has the same effects as a mortgage, has an advantage since it is not subject to the land registration tax. Therefore, it is less expensive for the borrower. It is intended for credit subscribers for purchasing new or old property. It does not apply to construction. Moreover, its price is very interesting for purchasing an old property. The choice of security can be left to the future buyer before signing his loan offer. However, most of the time, the bank imposes its preference. Today, the mortgage represents less than 30% of loans.
Bank security
Banks have power over guarantee institutions since they are generally internal subsidiaries of the banking group or Crédit Logement (Housing credit), an organization owned by all the major French banks.
The bank guarantee (or bank security) is provided by financial institutions, insurance companies or even professional insurances.
This is financial coverage on the basis of a guarantee fund. Borrowers contribute to protect themselves against a default. The fund takes care of the monthly payments in the case of difficulty in repaying the loan by the borrower.
During a bank guarantee, in exchange for the guarantee, the borrower pays the surety company:
- a deposit fee, which means, a percentage of the loan amount or a lump sum,
- a contribution paid to a guarantee fund
The financial terms which are offered vary from one institution to another and depend on the amount which is borrowed, the amount of maturities and the age of the borrower.
The amounts paid by the borrower corresponding to the cost of the deposit are returned at the end of the contract by most establishments, but these amounts are not revalued, so the latter are generally obsolete after twenty years of loan.
Bank guarantees from internal subsidiaries are generally less expensive than other guarantees since the acquirer does not get any money back at the end of the loan. With Crédit Logement, it is possible to recover a certain percentage of the part of the deposit invested in the mutual guarantee fund (FMG). The refund rate is approximately 70% of the payment to the FMG. The restitution generally makes it possible to recover half of the sum paid at the signing of the loan.
The bond entails an initial cost close to 1.5% of the amount of the loan.
Good to know: some mutuals can stand surety. The “civil servant mutual” guarantee offers advantageous rates.
After three or four unpaid installments, the surety pays the lender. At the same time, it approaches the borrower in order to find amicable solutions. The surety favors the rescheduling of the credit to an immediate seizure of the assets. Nevertheless, if there is no way out possible, the bonding establishment first registers a judicial mortgage at the borrower's expense and then seizes and sells the property in order to be reimbursed. This mechanism is extremely expensive for the borrower.
Careful: the deposit can only guarantee a Social Access Loan (PAS) if the loan amount is less than 15,000€ . In addition, in the case of a zero rate loan (PTZ), the guarantee is necessarily a mortgage when a PAS is associated. There is also the joint and several guarantees of an individual, however, it is often not enough during a mortgage.
Mortgage
The mortgage is a traditional guarantee given by the borrower on his property.
It must be established by the notary and published at the Land publicity service.
Its cost is higher than a deposit since it includes :
- the notary's fees,
- the real estate security contribution (the salary of the mortgage registrar),
- the land registration tax,
- the costs of formalities and disbursements
When the purchaser uses the PTZ or an approved loan, he is exempt from the land registration tax.
The mortgage registration is valid for the entire loan term, plus 1 year, but it cannot exceed 50 years.
However, the mortgage is ineffective after payment of the last installment of the loan. After this year, the registration automatically drops and disappears without any fees or formalities. The mortgage is lifted automatically one year after the end of the repayment.
The borrower can sell his property before the end of the loan. In this case, he must get the mortgage released (fees of the notary, VAT, contribution to real estate security, registration fees, administrative costs).
In the event of default by the borrower, if no amicable solution is found, the creditor puts his guarantee at stake, by having the property seized and then sold.
In the case of a payment default, the mortgage guarantee seizes the housing to sell it at a judicial auction. The bank can recover the amounts due. However, in the case of non-repayment of one or more monthly payments, one looks for amicable solutions before the seizure of the property.
The mortgage is to be favored when there isn’t a resale on the agenda. One doesn’t pay a fee at the end of the repayment of the credit.
The mortgage is almost compulsory when the mortgage is requested without contribution or by the self-employed. Depending on the borrower's profile, surety companies may refuse to guarantee the mortgage when they believe that the buyer is at risk.