60% of French households own their main residence and most of them finance it in part with a mortgage. For the past ten years or so, the French have started buying real estate at an earlier age.
The period is indeed very favorable to the financing of the purchase of real estate by a real estate loan. Why not take advantage of low rates and extended terms? In addition, in addition to protecting borrowers from over-indebtedness, the State and communities greatly promote home ownership, particularly through the many assisted loans, to which you may be entitled!
To put the odds in your favor, be well prepared. Pretto rolled up his sleeves to dissect the operation of a mortgage in the following lines and help you achieve your project!
Understand everything about mortgage loan
How does a mortgage work?
Understanding how a loan works means mastering the notion of “interest”. They represent both the main cost in financing a real estate acquisition and the heart of the mechanics of banks. In addition, the operation of a mortgage is not very intuitive! So we are giving you some clarification.
Most borrowers have a so-called amortizable loan (more on this below). How does it work ? Already, remember that you will have to pay interest and part of the capital for each monthly payment, but the share of both changes during the loan. Moreover :
The monthly payments are constant;
Interest is proportional to the outstanding capital.
To go further: Understanding the calculation of interest
They are therefore important at the start of a loan and decrease over time. The repaid capital (or amortized capital) is the difference between the monthly payment and the interest paid. Unlike interest, the repaid capital increases from month to month.
In addition, the mortgage is in the majority of cases associated with a personal contribution . It is this amount of money that you will have to pay out of pocket when you buy it. Generally banks ask to bring at least 10% of the price of the property, which corresponds to the notary and guarantee fees. In fact, the more money you have, the more your banker will be reassured – but that’s no reason to put money aside, keep a safety mattress!
Guarantee and insure your mortgage
Home loan insurance
You can not cut it, taking out borrower insurance is mandatory to obtain a mortgage. And so much the better, since it guarantees the reimbursement of monthly payments in the event of a hard blow. It’s even a great way to protect yourself and your family.
There are several possible levels of coverage, from minimum subsistence to more comprehensive coverage. The minimum level of coverage varies depending on the project. Death insurance is compulsory. It ensures the repayment of the loan in the event of the death of one of the co-borrowers. It is always coupled with one or more disability insurance. There are several types of contracts covering different degrees of disability (partial or total) and inability to work (temporary or irreversible). The cost of insurance varies enormously depending on the contract, Pretto can help you minimize it.
To protect themselves more against the risk of default, banks require that the loan also be covered by a guarantee . It allows the repayment of the credit in the event of default of payment apart from the cases covered by the insurance. This collateral costs you around 1% of the loan amount. There are two types of guarantees: surety organizations and the mortgage (or real guarantee). The choice of guarantee depends partly on the bank: some banks will almost always favor the guarantee, others the real guarantee. A deposit is generally less expensive than a real guarantee.
Choosing the right mortgage
Most real estate loans granted in France are said to be “amortisable”, but there are other types of loans , in order to best suit your project.
The depreciable loan is the most common, it is the one that we offer in most cases at the end of the simulation of your mortgage. Its duration varies between 5 and 30 years, but in France borrowers choose an average of 18 years, according to Crédit Logement .
The capital is amortized over time (hence its name), that is to say that you gradually repay the borrowed capital. In most cases, the monthly payments are constant throughout the life of the loan. This allows you to have a clear idea of how much the loan represents on your budget.
Are you already an owner but want to change your accommodation? With a bridging loan , you can buy your next home before you commit to selling the current one – and use it as a down payment.
This loan helps you over a limited period: between the purchase of the new property and the sale of the old one. It usually does not last more than two years. When it arrives, you will have to repay it.
Nesting loans and smoothing
To allow you to reduce the total cost of a loan without increasing your monthly payments too much, the two-line loan, also called the pull-out loan, can be an option.
Some banks offer to split your financing into two loans with different terms: a short-term loan at a low rate , combined with a longer-term loan at a higher rate . The monthly payment of the longest loan is smoothed with that of the shortest loan in order to obtain a constant monthly payment over the entire period.
It is often wise to settle outstanding loans using part of your savings to avoid setting up a smoothing which would increase the duration, the rate and the total cost of the loan.