The French administration identifies the real estate loan as a loan relating to the purchase of a building for a home, or land to be built. Repairs or maintenance operations for amounts greater than € 75,000 belong to the category of real estate loans.
According to statistics from INSEE (National Institute of Statistics and Economic Studies), on January 1, 2013, 57.8% of French households owned their homes. This figure has remained stable over the past ten years. In 2015, the average transaction amount was around € 250,000, and the average loan amount was around € 180,000.
Today in United States the 20 year interest rate is 1.6%. With such a low level, households have an incentive to buy, because the cost of borrowing is low.
Who offers bank loans?
Today, many financial institutions can offer real estate loans, among which are banks, insurance companies ...
To obtain a bank loan on the best possible terms, consumers can call on a mortgage broker. The real estate broker is an intermediary between the financial institution and the borrower. The broker represents the consumer, he negotiates with the lending institutions to obtain the best possible borrowing conditions. The broker works with many financial institutions, they regularly send him their schedules including the applicable rates according to the profile of the borrower and the duration of the loan. Once the broker has negotiated the terms, the consumer can choose the lending institution from among the broker's various proposals.
To obtain a mortgage, households must provide a lot of information to financial organizations. These include in particular: proof of identity, family situation, domicile, income. Concretely, the supporting documents are:
- identity document,
- family record book, PACS certificate,
- receipt of less than 3 months,
- the last three payslips, tax notices, the last three account statements ...
In addition to this, if the household had any loans that had not expired, then this information should be made available to the lending institution. The objective is to analyze as best as possible the financial situation of the acquiring household. For this, the bank will try to determine the borrowing capacity of the household. Knowing that the debt ratio commonly accepted for households is 30%, to calculate the borrowing capacity of the household, financial organizations rely on 3 factors.
They take into account:
- household resources (wages, salaries, allowances, income from movable property and income from property, etc.)
- the TEG applied, as a general rule
- the duration of the loan.
Lending institutions particularly appreciate borrowers with financial support. They are also attentive to the way in which the borrower manages his budget. It is for this reason that they will ask him to provide his last three bank statements. A client over and over again will be a risky client for the banker. Due to the length of the loan, it is essential for the lender that the borrower has an open-ended contract.
When a household finances a real estate purchase, the level of the interest rate (Global Effective Annual Rate) is essential. It is the interest rate that determines the cost of financing. The household wishing to acquire a property via a mortgage has the possibility of taking out debt at fixed or variable rate.
When the borrower chooses a fixed rate debt, the lender can do several simulations. In these simulations, the applicable interest rate will be different depending on the maturity of the loan. The longer the term, the higher the interest rate will be. This is explained by the fact that the longer the duration of the loan, the more risk there is for the lender.
When the borrower takes out debt at variable rates, the interest rate applied to his loan is indexed to one of the market rates, in Europe, the reference is the Euribor (US dollar Interbank Offered Rate) which has different terms ( 3 months, 6 months, 1 year ...). Due to the duration of the credit, the borrower taking on variable rate debt will have every interest in requesting a cap, that is to say a maximum level of variation in his interest rate. But by benefiting from a cap, the starting rate of the loan will be higher than if his credit was not capped.
By choosing the fixed rate, upon subscription to the mortgage, the borrower knows exactly what the cost of his loan will be. He has visibility over the entire duration of his credit. However, when taking out the mortgage, the fixed interest rate is higher than the variable interest rate. Knowing that at the start of the mortgage loan, the borrower mainly repays the interest on the loan, it is more interesting to benefit from the lowest possible interest rate at the start of the loan. Borrowers choosing to take on variable rate debt have the option of making early repayments without penalties. In addition, very often in the loan agreement there is a clause allowing the borrower to switch from a variable rate loan to a fixed rate loan. Finally, even if the consumer has decided to go into debt at a variable rate, it will be possible for him to modify his loan to switch to fixed rate debt, if his contract provides for it.
The borrower has the option of making an early repayment of his loan. However, if the loan is at a fixed rate, the prepayment value must be at least 10% of the loan, unless the borrower repays the loan balance. If this was not the case, the borrower would have to pay penalties. But the public authorities have legislated on the level of penalties. On the one hand, the penalties may not reach more than 3% of the capital remaining due before the early repayment. On the other hand, the penalties cannot be greater than 6 months of interest on the outstanding capital of the borrower.
Since then, the law of July 1, 1999, under certain conditions, early repayment by the household may not be subject to penalties. In particular if one of the spouses dies, if the reimbursement is made because of a professional transfer of one of the spouses, or even because of a dismissal.
French law requires the borrower to properly inform the lender of the risks of a mortgage. In addition, he has the obligation to provide him with at least two different simulations, with different durations and deadlines. After receipt of the loan offer, the borrower has a cooling-off period of 10 days, it is only at the end of the cooling-off period that the borrower can accept the loan offer which remains valid. for 30 calendar days.
For a mortgage, insurance is not compulsory for the borrower, however, the financial institution may require it from the borrower. Generally, due to the length of the loan, the lender requires insurance for the borrower. The risks it wishes to cover are generally job loss, disability, illness and death. The borrower remains free to choose his insurer. For people affected by health problems, the AERAS convention is the way to insure. The borrower has the option of canceling his insurance within one year of setting up the mortgage, however, in order for the termination to take place, the lender must have accepted it.
Borrowers who already have a mortgage whose conditions seem unfavorable have the possibility of renegotiating it. Thus, if the interest rates have fallen sharply, it will be more interesting for the borrower to renegotiate his credit. To renegotiate his credit, the borrower must contact the bank that issued his mortgage, in order to obtain an endorsement on the mortgage loan contract. The amendment would contain the change in the interest rate, and a new schedule.
If the negotiation with his banker does not lead to the expected result, the borrower always has the possibility of having his loan redeemed by another financial institution. But before redeeming this loan, he must ensure that the transaction is interesting for him, because he will have to pay new fees, and he could be subject to prepayment penalties.
The legislator has put in place many measures to help households access homeownership. Among these devices are the Zero Rate Loan (PTZ), this loan is exclusively intended for the purchase of the first main residence. This system is very supervised, it is subject to income conditions which vary according to the zone in which the household wishes to buy its property. In addition, the zero rate loan is necessarily associated with one or more bank loans, a contribution, or even other devices. The advantage of this loan is the repayment period which is spread over 20 or 25 years, in addition the buyer benefits from a deferred repayment. The deferral can be spread over 10 or 15 years. Many establishments offer PTZ.