Financing
FINANCING
REAL ESTATE LOANS
Many people use credit to finance their acquisitions. It can be a financial lever, a perfect tool for building wealth, provided that debt is only a transitional phase before realizing the added value of your acquisition… Common sense dictates that, before embarking on a real estate transaction with credit, you should carefully assess the limits of your investment capacity, and be aware of the various loans available.
RELAY LOAN
The bridging loan or buy-to-let loan is offered to homeowners who wish to acquire a new property before selling an existing one.
Taking out a bridging loan enables you to obtain an advance from the bank on the proceeds of the
future sale.
The funds released thanks to this short-term bridging loan give
the buyer the time he needs to sell his previous home without having to
sell it.
What’s more, it’s generally difficult to reconcile purchase and sale dates.
THREE POSSIBLE FORMULAS:
1 – DRY RELAY LOAN
This formula is suitable for the purchase of a new property whose value is less than or equal to the value of the property sold.
In this case, the bank offers a “dry” bridging loan, i.e. a simple financial advance repaid by the sale of your own property.
In this case, the advance is short-term: one year maximum, and the borrower pays back only the interest on the loan on a monthly basis.
2 – JOINT RELAY LOAN OR RELAY LOAN ACCOMPANIED BY A REAL ESTATE LOAN
If the amount of the bridging loan is not sufficient to finance the purchase of a new home, the borrower must top up the remaining sum with a real estate loan.
Until the first property is sold, the borrower repays the interest on the bridging loan each month, in addition to the monthly instalments on the conventional mortgage.
In this case, it is also possible to benefit from a deferred payment: here, the interest is not repaid monthly, but is capitalized.
This gradually increases the amount to be
repaid when the property is sold.
The monthly instalment is thus much lower, but the total amount to be repaid will be higher the later the sale.
3 – RELAY LOAN WITH “TOTAL FRANCHISE”
This formula is granted for a 24-month term.
In this case, the borrower does not repay
the loan interest for the first 12 months.
If he sells his property before this
deadline, he repays the capital of the bridging loan and the interest due for the months that have elapsed.
If the borrower has not sold his or her property within the first 12 months of the bridging loan, he or she repays the loan interest and the first year’s interest from the thirteenth month onwards.
AMORTIZABLE CREDIT
Amortizable mortgages are the most common form of home financing in France.
As its name suggests, it enables each borrower to pay off both the principal and the interest in the same monthly payment.
The further along you are in the loan, the lower the proportion of interest due, giving way to
capital repayment.
It’s commonly said that you repay the interest on the first
part of the loan and the capital on the second.
With each repayment, you owe less and less capital to the bank, so you “amortize” the asset.
However, depending on the terms of the contract, monthly repayments may also be degressive or
progressive if repayments are flexible.
Each year, on the anniversary date of the loan,
monthly payments can vary by plus or minus 30%, depending on the customer’s wishes and capacity.
Finally, the interest rate on an amortizing loan can be either fixed or variable.
If it is fixed, the
borrower will lose out if rates fall, and gain if they rise.
Most borrowers prefer a fixed rate for greater security.
The variable rate, on the other hand, is made up of a reference index and a margin.
It is generally more attractive, but can be revised.
BULLET LOANS
This loan is ideal for investors wishing to finance a rental property.
It is reimbursed in two stages:
For the entire duration of the loan, the borrower pays only the interest
on the loan each month, or the borrowed capital is repaid at the end of the loan, in a single payment.
The bank verifies the borrower’s ability to repay the loan by requiring him or her to make monthly payments of a predetermined amount into a savings product (such as life insurance).
These savings, gradually topped up to the amount of capital borrowed, represent a guarantee of repayment at the end of the loan term.
The main advantage of this loan is fiscal: the investor can deduct the total cost of the loan from his rental income , which is higher than for a conventional loan.
Don’t forget that to take out a mortgage, the bank requires the borrower to have taken out disability and death insurance, to cover both monthly repayments and the capital borrowed.
If the borrower dies during the term of the loan, or becomes totally disabled, this insurance will reimburse the bank.
He or his heirs will then benefit from a fully paid-up home and a life insurance policy subject to the non-inheritance transfer regime.
In the event of partial disability, additional coverage is provided up to the amount of the disability.
HOW TO TAKE OUT A LOAN
To take out a loan in your own name with a bank for a property purchase,
various documents are required:
● Identity card for single person, Livret de famille for couple, Proof of current address
● If employed: 3 last pay slips (as well as the one for the last month of December as
all salaries for the year have been cumulated) + employment contract
● If self-employed: 3 latest balance sheets + income statement + articles of association + KBis, Proof of
ancillary income (e.g. property income)
● 3 latest bank statements from other banks where the borrower is a customer
● 2 latest tax notices
● Purchase agreement
● Amortization schedules for current loans
When purchasing through a Société Civile Immobilière (SCI), the same personal documents must be provided by each partner.