A mortgage is a real security that encumbers a property as collateral for a debt, without the owner being dispossessed of it. This comprehensive guide explains what a mortgage is, how it works, what types exist, what costs to expect, what risks it involves, and how to set it up. You will also discover possible alternatives and the concrete steps to mortgage your property. Understanding a mortgage allows you to better negotiate your loan and protect your assets with peace of mind. Do you have a real estate buying or selling project? Contact your local Capifrance advisor for tailored support. Discover the value of your house or apartment in 1 minute with our online property valuation tool!
What is a mortgage and how does it work
The definition of a mortgage under french law
A mortgage encumbers a property as collateral for a debt, without the owner being dispossessed of it. If you borrow to buy a house or an apartment, the bank may require a mortgage on this property to protect itself in case of default. According to the French Civil Code, a mortgage is an accessory real right: it exists only as long as the main debt remains. Once your mortgage loan is repaid, the mortgage automatically ends. The owner retains full use of the property throughout the duration of the loan: they can live in it, rent it out, or carry out renovation work without particular restriction. In international terminology, the English term mortgage refers to this same mechanism.
The role of the notary and registration with the land registry service
Setting up a mortgage necessarily involves a notarized deed. The notary drafts the mortgage deed, verifies the legal capacity of the parties, and ensures that the property can indeed be mortgaged. Once the deed is signed, the notary registers it with the land registry service (formerly the mortgage registry). This registration gives priority ranking to the creditor. In the event of sale of the property or collective proceedings, mortgage creditors are repaid according to their order of registration. Registration also makes the mortgage enforceable against third parties, ensuring legal security. The duration of the registration corresponds to that of the mortgage loan, plus one additional year. For example, for a 20-year loan, the mortgage remains registered for 21 years. After this period, it expires automatically without any action or cost for the borrower.
What are the different types of mortgages for a real estate loan?
Conventional mortgage
A conventional mortgage results from a voluntary agreement between the borrower and their bank when taking out a mortgage loan. It is formalized by a notarized deed, as required by the French Civil Code, and is the most common form of guarantee to finance a property purchase. This real security concerns the acquired property and allows the bank to protect itself in case of default. It applies to all types of transactions: existing property, new housing, construction, or land purchase. Its main strength lies in its legal security, particularly appreciated for complex projects such as partial VEFA or custom construction.
Legal mortgage
The most common form is the special legal mortgage of the lender of funds, which has replaced since 2022 the former lender’s privilege (PPD). This guarantee applies when the bank finances the purchase of an existing property. Its main advantage: it is exempt from land registration tax, significantly reducing costs for the borrower. However, it cannot be used for new properties, VEFA, or in Alsace-Moselle. Another form of legal mortgage exists between spouses, automatically registered in certain patrimonial situations defined by the Civil Code.
Judicial mortgage
A judicial mortgage is ordered by a court in the context of legal proceedings. It generally occurs when a creditor wants to secure an unpaid claim or obtain a guarantee pending a final court decision. The enforcement judge may authorize the registration of a precautionary mortgage on one or more of the debtor’s properties, even without their consent. This protects the creditor from the risk that the debtor becomes insolvent by selling their assets before the final judgment. Once the debt is recognized or the dispute settled, the mortgage may be converted into a definitive mortgage or lifted depending on the outcome.
Rechargeable mortgage
The rechargeable mortgage was introduced in France in 2006 to stimulate consumption and facilitate access to credit. It allowed the reuse of mortgage security to finance new loans without creating a new mortgage each time. However, the law of March 17, 2014 removed this system for individuals due to over-indebtedness risks. Mortgages established before that date remain valid.
Why mortgage your property to borrow?
Mortgage loan and borrowing using your property
Mortgaging your house or apartment allows you to obtain liquidity without selling your property. This solution is aimed at owners who want to finance renovation work, consolidate debts, launch a professional project, or obtain additional cash. It is important to distinguish between a mortgage loan and a mortgage credit. The mortgage loan refers to a new loan secured by property you already own, while mortgage credit is a broader term covering all loans secured by a mortgage.
How much can you borrow with a mortgage
The amount you can borrow depends on three main criteria. The bank estimates the value of the property, then applies a mortgage ratio generally between 50% and 80%. Finally, your repayment capacity is assessed based on your debt ratio, which must not exceed 35% of your income. For example, for a property worth €200,000 with a 70% ratio, you could borrow up to €140,000 depending on your financial profile.
What are the costs and rates associated with a mortgage?
Notary, registration and land registry fees
When mortgaging a property, several costs apply. Notary fees cover the drafting and registration of the mortgage deed. The land registration tax amounts to 0.715% of the guaranteed amount. Additional administrative and security fees also apply. In total, costs represent around 1.5% to 2% of the loan amount.
The cost of mortgage release
Mortgage release is the procedure to remove the mortgage before its natural expiration. Fees usually range between 0.3% and 0.6% of the initial loan amount. The mortgage automatically expires one year after the final repayment without cost.
What is the difference between mortgage, guarantee and PPD?
Mortgage as a real guarantee
A mortgage provides the bank with a real right over the property, allowing seizure in case of default. It applies to all types of property but involves significant costs and formalities.
Bank guarantee
A bank guarantee involves a third-party organization covering the loan in case of default. It is simpler and often less expensive, with partial refund possible.
Lender’s privilege (PPD)
Now replaced by a legal mortgage, it is cheaper but limited to existing properties.
What are the risks of mortgaging your property?
Seizure rights
In case of default, the creditor may initiate foreclosure proceedings. The process includes legal steps and may result in forced sale.
Impact on resale and refinancing
Mortgage release is required before resale. It generates additional costs and must be anticipated.
How to mortgage a property: steps and formalities
The process
The process includes property valuation, loan application, and signing the mortgage deed before a notary.
When to release or renew a mortgage
Release is necessary in case of resale or early repayment. Otherwise, the mortgage expires automatically one year after the end of the loan.
Faq on mortgages
How long does a mortgage last
The duration corresponds to the loan duration plus one year.
What is a mortgage loan
It is a loan secured by a property you own.
Is a mortgage mandatory
No, alternatives such as guarantees exist.
Key takeaways before mortgaging your property
A mortgage secures the lender without dispossessing the owner. Several types exist depending on the situation. Costs are significant, but alternatives exist. For tailored support, contact a local Capifrance advisor.
Author
Frédéric Rémy – Director of Commercial Performance
A real estate professional for several years within the Capifrance network, I would like to share with you some essential advice to help you succeed in your real estate project with the support of our advisors.
