The property loans
Many take a loan to finance their purchases. It can be a financial leverage, a perfect tool to create holdings provided one is careful that indebtedness is only a transitional phase before making the capital gains on one's purchase. Common sense imposes to evaluate carefully the limits of one's investment capacities such as having noted the various existing loans before committing to a real estate operation with credits.
The bridging loan
The bridging loan or loan for purchase and resale is offered to the owners who wish to purchase a new property before having sold the property put on the market.
Taking a bridging loan offers the option to receive from the bank an advance on the future proceeds of the sale. The funds released thanks to this transition loan on short term enable the purchaser to have the time necessary to sell his/her previous lodging without having to sell it off cheap. Moreover, it is generally difficult to have the dates of purchase and sale converge.
Three possible formulas :
1- The dry bridging loan
This formula suits the purchase of a new property with a value inferior or equal to the property sold. In this case, the bank offers a "dry" bridge, that is to say a simple financial advance reimbursed by the sale of one's own property. Here, the advance shall thus be on short term: one year maximum and the borrower only reimburses monthly the interest of the loan.
2 - The coupled bridging loan or bridging loan accompanied with a property loan
If the amount of the bridging loan is not sufficient to finance the purchase of a new housing, the borrower thus has to cover the remaining amount by a property loan. As long as the first property is not sold, the borrower reimburses the loan interest every month of his bridging loan, in addition to the monthly instalments of his usual property loan. It is thus possible in this case to benefit from a differed payment: here, the interests are not paid back monthly but are capitalized. They thus increase progressively the amount to reimburse at the time of the sale of the property. The instalment thus much relieved but the total amount to pay back in the end shall be heavier by as much as the sale is executed late.
3 - The Bridging loan with a "total allowance"
This option is granted for a term of 24 months. In this case, the borrower does not reimburse the loan interests during the first 12 months. If he/she sells his/her property before then, he/she pays back the capital of the bridging loan and the interest for the past months. If the borrower has not sold his/her property in the first 12 months of the bridging loan, from the thirteenth month he/she pays back the loan's interest as well as those of the first month.
The redeemable credit is the most common loan solution in France with individuals to finance properties. As its name suggests, it enable each taker of this sort of loans to pay amortize at the same time the capital owed as well as the interest in the same instalment.
As time goes by on your loan, the lower is the share of the interest, leaving space for more amortization of capital. We commonly say that we pay the interest of the loan during the first part and the capital in the second part. On each instalment we owe less and less capital to the bank, we "amortize" thus the property this way.
However, depending on the terms of the contract, the instalments can also be decreasing or increasing if the instalments are flexible. Every year, on the anniversary date of the credit, the instalment can vary by more or less 30% depending on the wish and the capacity of the client.
Finally, the interest rate of the redeemable credit can be fixed or flexible. If it is fixed, the borrower will lose out if the rates decrease and win if they increase. More often the borrowers favour the fixed rate for more safety. The flexible interest rate consists in a reference index and a margin. It is in general more attractive but revisable.
The in-fine loan
This loan is favourable to investors who wish to finance a property to be rented out. Its repayment is made in two steps:
During the whole term of the loan, the borrower only pays back monthly the interest of the loan or this capital borrowed is only reimbursed that the end of the loan, in one instalment.
The bank verifies the borrower's capacity of repayment imposing him a monthly payment on a savings product (a life insurance for example) for a pre-determined amount. This saving progressively supplied up to the capital borrowed represents a guarantee of reimbursement at the maturity of the loan. The main advantage of this loan is on a tax point of view: the investor can deduct the loan interests from his income, the total amount of which is higher than for a classic loan.
Do not forget that, to take a property loan, the bank demands that the borrower takes a life insurance covering death and invalidity to cover its instalments and the capital borrowed. Despite its cost, this security offers some advantages: if the borrower dies during the term of the loan or were to become an invalid, this life insurance will reimburse the bank. Himself or his heirs will then have a house fully paid and a life insurance subject to the regime of the transfer outside of the inheritance. In case of a partial invalidity, the coverage will be in proportion with the level of incapacity.
Means to take a loan
To take a loan in your personal name in a bank regarding a purchase in real estate, a certain number of documents are required:
- ID card or passport for a single person, Family booklet for a couple, or marriage certificate, justification for your current domicile
- If you are an employee: the last 3 pay slips (as well as that of the month of December because it adds up all the wages of the year) + work contract
- If self-employed: last 3 balance sheets + financial results + articles of association + Registration form (K-bis in France) Proof of other income (i.e. real estate income)
- bank statements of the last 3 months of the other banks in which the borrower is client
- last 2 tax returns
- prior agreement to purchase
- amortization schedule for current loans
In the scope of a purchase via a Civil Company in Real estate (SCI) the same personal documents should be provided for each partner.