Equity release in English or crédit hypothécaire (mortgage loan)in French, this somewhat Anglo-Saxon concept allows the owner of a property asset to release cash from his/her asset base in order to finance another project.
Many French banks wrongly consider this technique to be very risky and hurriedly reject applications from their customers. This reaction is absolutely not justified since the result is exactly the same as for purchasing a property asset, main residence or other property investment. In fact, in the context of a property project, a borrower nearly always provides collateral to a bank, whether in the form of a mortgage, a money lender’s preferential claim (very similar to a mortgage) or a housing loan type surety (which reserves the right to take a mortgage in the event of default by the borrower).
Finally, why so much reluctance by French banks with regard to equity release?
French banks cautious about equity release.
In France, a loan is essentially granted on the basis of an analysis of the borrower’s revenues and expenses. The asset base is addressed but is considered to be less important in assessing the risk and the borrowing capacity. In the Anglo-Saxon countries, the asset base is valued by the banks and taken into account for reimbursing a loan. This approach may also generate wrongful use ending up with the crises that we have already seen. It is unfortunately this last point that the banks bear in mind.
Why use this type of loan ?
However, a few specialist banks or well-informed bankers still agree to grant equity release solutions. There are multiple objectives for customers using the equity release system: acquisition of a property abroad, settlement of death duties, gift, payment of a tax, generating the amount needed for another property purchase project, investment in an unlisted company… Currently, the equity release loan may represent an advantageous low-cost driver for investing in projects offering an attractive return.
What proportion of involvement and what types of guarantee ?
The method and cost vary from one bank to another. The proportion of financing will often be between 50% and 80% of the property’s value. The amount of the loan will in particular depend on the property’s quality, its geographical location and its liquidity (can it be sold quickly in the event of a problem?) The figure of 70% is generally retained in order to have an adequate mortgage margin in the event of a forced sale. Some banks will refuse to take the principal residence as collateral so as not to put the owners in difficulty if they do not manage to repay their loan. Others will refuse rental apartments for fear of having difficulties with the tenants and finally having difficulty in selling it in case of need. These reasons are understandable but if the banks extended such criteria at the time of purchase, in that case few people would be able to purchase their principal residence or make a buy-to-let investment.
What is the cost and duration of an equity release ?
The cost of an equity release remains completely controlled thanks to the relatively low lending rate at the moment which protects the consumer (the lending rate is the rate that a loan must not exceed so as to protect the borrower). Care is need if this loan would be used mainly for redeeming consumer lending, in which case the applicable lending rate would be much higher. Some banks may apply a floating rate. In that case, the margin often varies between 2% and 2.5% above Euribor.
The duration over which this type of loan may be made is generally 2 to 15 years, even a little more exceptionally. For a customer having a one-off requirement and needing cash for a short period while selling an asset (a property asset, a business…), this loan can take the form of a bridging loan. N.B., for this the borrower will need to prove to the bank the virtual certainty of the event that will at the end of the day enable this loan to be cleared.
The bridging loan is mostly provided in the form of a term loan. It will take the form either of a term loan where the borrower must pay interest periodically, or a term loan with capitalisation of interest over the whole period. In this last case, the borrower does not pay anything every month (except insurance when the bank requires this), the interest is capitalised and at the end the borrower repays the interest and the principal. Since the bank has a relatively low economic interest in making this type of loan, it is a little more complicated to find and the administrative costs are often higher.
More conventionally, it is also possible to be granted a long-term equity release over 10 or 15 years which will be reimbursed by the rents or other revenues collected. This is an important point. Just because you are offering a property asset as collateral does not mean that the bank will refrain from analysing your revenues. As with a conventional mortgage loan, the broker and the bank will make sure of your borrowing capacity by analysing your revenues and expenses. Some banks, especially private banks, may also be inclined to ask that you place a proportion of the funds released under their management.
For more information : The usury threshold determined by the Banque de France every quarter