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A mortgage is a loan relating to a property. The creditor (bank, insurance company etc.) lends a sum of money to the buyer who gives the building as security. The buyer can keep the building so long as repayment of the loan is guaranteed.
- If the buyer fails to keep up repayments the creditor can seize the building and sell it in order to recover the sum due.
- This type of loan is particularly suitable for the purchase of a building or land. The creditor advances all the money and the purchaser repays with interest according to a defined schedule.
- Mortgage repayments are normally made over an agreed period of 20 years but 15 or 30 years are also possible, depending on the borrower's financial circumstances. However, a thirty-year loan would be more likely to be granted to young applicants.
If you have a mortgage, you can claim tax relief. To find out where you stand, refer to our Tax relief page.
Mortgage, appreciation, guaranteed collateral...
There are several different terms to describe real estate borrowing, but the basic concept is the same: your property is mortgaged to provide the lender with a guarantee. This means that if you default on your repayments, the lender can repossess and sell your property to recoup its costs. If this happens and you have only borrowed part of the value of the property, you can really lose out. It doesn't matter to the lender if the property is sold for less than it's actually worth, as long as the sale price covers what you still owe.
However, the term 'guaranteed collateral' (mandat hypothécaire, in French) refers to a different concept. It is a legally valid document that the borrower signs in favour of the lender, authorising the lender to take out a mortgage immediately, without even warning the borrower, should it consider that the borrower has defaulted on its obligations. The advantage of this set-up is that the borrower avoids paying registration fees and the mortgage registration fee. Even though there are solicitor's fees for setting up the guaranteed collateral arrangement, it still works out much cheaper. With this procedure, the lender takes a certain risk, as a dishonest borrower could sell the property or mortgage it with another lender. Consequently, it is relatively rare for lenders to agree to this set-up, unless they fully trust the borrower. The borrower must trust the lender too, as his fate is in its hands. If, for any reason, the lender should decide to use the borrower's collateral and take out a mortgage on his property, this arrangement will end up being much more expensive for the debtor.
If you want to benefit from mortgage tax relief, you can also take out a mortgage for the maximum relief amount and have the rest as guaranteed collateral. A lender will be more likely to agree to the guaranteed collateral set-up if it only covers part of the value of the property, but here again, weigh up the risks before taking this path.
You can borrow more than the value of your property, to cover registration fees or carry out immediate work, but the interest rate will be higher. The lender calculates the amount you can borrow based on the surveyed value of the property; if the planned work will add sufficient value to the property, the lender should not ask for additional guarantees. But be careful, you must also make sure you'll be able to keep up with the repayments: have a look at our borrowing capacity page. It may be better to take out a separate loan for works, though it will depend from case to case, so talk to your lender.
If you can wait a few years before doing the work, you'll be able to borrow back the capital you have repaid so far. This usually works out cheaper than taking out a new loan.
It is also useful to remember that a mortgage is not only used to purchase a property, but also to keep it: payment of gift tax, death duty in the event of inheritance or even refinancing.