Taking out a mortgage is the way for the vast majority of individuals to become homeowners. Regardless of the purpose (primary residence, rental property, second home, etc.), every loan must be secured by collateral to cover any default by the borrower.
There are essentially two types of collateral that allow banks to protect themselves in the event of a borrower’s default: a mortgage and a bank guarantee. Each of these forms of collateral has its own specific characteristics, advantages, and disadvantages. Our goal with this article is to help you make the best choice between a mortgage and a bank guarantee.
The Mortgage: The Traditional Form of Security for a Home Loan
A mortgage used as collateral for a home loan is called a conventional mortgage. It is important to distinguish this from a judicial mortgage, which allows a creditor to recover the debt.
A conventional mortgage can be viewed as a security deposit on the very object of the loan—namely, the real estate property. In the event of default, the house or apartment is foreclosed upon and sold to repay the lender (bank or credit institution).
A mortgage has the same term as the mortgage loan. It must be executed before a notary and is registered in the land registry. If the mortgage payments are made on time, the mortgage registration is automatically removed after one year. No action is required to confirm this removal.
The cost of the mortgage includes the notary’s fees for registering it, administrative fees, VAT, and the land registry fee. It is therefore also one of the expenses to factor into the cost of purchasing a home.
It is possible to release a mortgage before the loan matures. This is referred to as filing a request for release. This is typically done in the event of early repayment. It is also done if you sell your property before the loan is fully repaid or in the event of a loan consolidation. This may happen, for example, if you plan to move to Hossegor or Albi while you still have an outstanding loan in Paris and you sell your property to make this life change a reality. You should expect to pay release fees.
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A guarantor: a popular alternative for securing a mortgage
A guarantee, also known as a surety, is a form of security provided by a bank, an insurance company, or a specialized organization. More specifically, this entity acts as a guarantor to the lender in the event that the borrower can no longer repay the loan. It will then be responsible for paying the remaining monthly installments.
The cost of a real estate guarantee includes the commission paid to the company that issues the guarantee. It also includes the contribution to the Mutual Guarantee Fund (FMG). This reserve fund enables the company to guarantee repayment in the event of the borrower’s default before the end of the loan term. Depending on the institution chosen, it is possible to recover up to 75% of the amount contributed to the FMG.
Unlike a mortgage, there are no fees to pay to guarantee companies if you repay the loan early or sell the property before the term ends.
There is what is known as a joint and several guarantee, in which the guarantee company is replaced by one or more individuals. This is usually a close relative.
Mortgage or Security Deposit: Which Is the Better Choice?
From a financial standpoint, using a surety company remains the most advantageous option. The cost of a mortgage guarantee can, in fact, be up to twice that of a bank guarantee depending on the amount of the mortgage and the type of property. Furthermore, this type of guarantee does not incur any additional fees in the event of early repayment or if you transfer your mortgage to another lender.
In some cases, it is not possible to use a surety company. Here are the situations in which a surety bond is not an option:
- Off-Plan Sales (VEFA): purchasing off-plan does not allow for the use of a surety bond;
- Social Housing Loans (PAS);
- A zero-interest loan (PTZ) combined with a PAS;
- Self-build;
- A mortgage with no down payment is subject to the bank’s approval.
In this case, a mortgage is required.
A mortgage is also a good option for buyers who do not wish to make early payments and who plan to keep their home for the long term. In fact, without the release fees, the cost is roughly the same as a security deposit.
Generally speaking, a security deposit is easier to arrange than a mortgage. In fact, six out of ten French people have chosen it to secure their loan. However, you should pay close attention to the provider chosen by the bank. If you find the offer unattractive, consider asking the lender for a list of authorized guarantor companies and compare their offers. Feel free to consult our guide for first-time homebuyers if you’d like more advice on your project.
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