The evolution of mortgages in France

Two new types of mortgage will soon be available in France, following a law voted in March 2006: the Rechargeable Equity Release Mortgage and the Retirement Mortgage. The idea is to increase spending and confidence in the economy by releasing equity tied up in properties. The rechargeable equity release mortgage enables the guarantee already taken on the property to be reused for other loans. For example, you purchase your main residence for €300,000 using a mortgage of €250,000 over 20 years at a fixed annual rate of 3.80%. Five years later, you will have paid off €46,824 of the capital. This is the amount you can re-invest in a loan, provided it is written in to the initial loan document. Therefore, as the capital borrowed is paid off, the borrower can benefit from new borrowing opportunities without having to go through any new formalities. There is a saying in France: “ whoever pays his debts gets richer ” . The advantages are not only practical but also logical: you can release cash to pay for expenses such as building works, or to buy goods. [...]

The Retirement Mortgage enables you to liberate a part of the liquid value of your main residence. This type of loan would be principally aimed at retired people whose banks have already fixed a minimum age limit of 75 years. According to INSEE [the national records office in France], 70% of 75 year old retired people are outright owners of their property. The capital in their main residence could be ‘released' in one of three ways: in a one-off payment, in the form of regular payments, or as a fluctuating credit line for the term of the loan. [...] Finally, apart from the rechargeable equity release mortgage and the retirement mortgage explained above, there are other solutions which are adapted to individuals or companies who wish to release liquidity and guarantee the loan with their real-estate, whether it is their main residence, secondary residence or a rental investment. For example, a bank can offer you an equity release , after valuation of your property, using a repayment or interest only loan for up to 100% of the valuation, provided that approximately 50% remains reinvested as a life-insurance policy managed by the bank. The structure of the interest only loan has a particularly strong argument: the life-insurance policy secures the operation because the interest earned on the portfolio pays off the capital borrowed. The borrower, without being unrealistically optimistic, can practically count on a difference in his favour between the interest rate paid on the loan and the interest earned on the life-insurance portfolio. There are many advantages of such a product: liquidity, diversification of assets by broadening a long-term investment portfolio, estate planning, tax optimisation and realisation of all your future projects. In addition, the funds lent are free to be used however you wish. [...]

Originally published in “ Investissement Conseils ” , July 2006, written by Pascal Marcerou
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Contact: Pascal Marcerou, pmarcerou@antco.com