Making the Right Choice: Understanding Mortgage Guarantees

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Published on
Tuesday, August 29, 2023 8:36 AM
by the Meilleurtaux editorial team

Obtaining a mortgage is not just about signing a contract. Banks require specific guarantees to secure their investment. Between the mutual guarantee, the mortgage and the privilege of lender of funds, how to make the informed choice? Response elements.

Mutual guarantee: economical and ingenious

As part of the subscription of a mortgage with your bank, the latter will systematically require, in addition to the death and disability insurance, a reimbursement guarantee which would allow it to recover its money in the event of the insolvency of the ‘borrower.

Consider first mutual surety, an economical and advantageous alternative. Its low cost, estimated between 0.5% and 1% of the amount borrowed, makes it particularly attractive. This mechanism implies that a specialized entity (Crédit Logement, Socami, CMH, etc.) guarantees the loan on your behalf. However, the criteria for approval are strict, assessing your income, your debt ratio, your contribution, your employment contract and your banking history.

If approved, a fixed fee of 500 to 600 euros will be requested, as well as a contribution to the mutual guarantee fund (FMG).

Although its initial cost may be slightly more than that of a money lender’s lien, you will often receive a partial refund of the contribution at the end of the loan.

What rate for your project?

Mortgage: an expensive alternative

The mortgage, on the other hand, is positioned as the most expensive guarantee, to be avoided if possible. Its subscription is imposed for investments in new construction or the construction of a house, unless you are already covered by a surety entity.

This guarantee is subject to notary fees (0.32% to 1.55% of the capital borrowed depending on the value of the property), administrative costs (approximately 250 euros), a property security contribution (0.10%) and a land registration tax (0.715%).

One thing to consider: if you sell your property before the end of the repayment, you will have to pay a notarial “release” fee to withdraw the current mortgage. These costs vary from 0.30% to 0.60% of the amount lent (0.41% for 150,000 euros borrowed, or 615 additional euros).

Money Lender Privilege (PPD): A Reasonable Compromise

Prefer the privilege of lender of money (PPD) to the mortgage, especially for an investment in the old. Less expensive, it is exempt from the land registration tax at 0.715%, but requires “release” costs in the event of early resale.

ImportantCompared to the mortgage, the PPD is more affordable, its cost being about half the cost, regardless of the amount borrowed.

To refine your choice, a mortgage loan comparator will allow you to analyze the offers of different banks and access precise information on interest rates, repayment conditions and the guarantees required.

What rate for your project?

Collateral: pledging of your property

Avoid fees by offering property as collateral. If you have substantial assets, one of the guarantees mentioned above can be avoided.

In this case, you have the option ofoffer the bank a property as collateral, authorizing its assignment to repay the loan in the event of default. It can be housing, art, jewelry or even life insurance.

Collateral has the advantage of being free of charge and simply requires an amendment to the loan agreement to formalize the agreement.