In France ,no bank grants a home loan without a security that protects it in the event of non-payment. Three main solutions are available to secure a loan: a bank guarantee, a conventional mortgage and the lender's lien, each with its own costs and rules. Choosing the right home loan security depends on the borrower's profile, the type of property purchased and the intended holding period.
In summary
- The bank guarantee (through an organization such as Crédit Logement) is the most common form of security: it is simpler and makes it possible to recover part of the amounts paid into the mutual guarantee fund at the end of the loan.
- The conventional mortgage must be established before a notary and generates higher costs, particularly in the event of resale or early repayment (release of the mortgage).
- The lender's lien (PPD) is a less expensive alternative to a mortgage, but is reserved for the purchase of an existing older property.
- The choice mainly depends on the borrower's profile, the type of property being financed and the likelihood of an early resale: a Capifrance real estate advisor can help guide this choice based on the project.
Why does a bank require security for a home loan?
A home loan commits the borrower for fifteen, twenty, or even twenty-five years. Over such a long period, the bank must protect itself against the risk of non-payment resulting from a life event: job loss, disability, separation or death. Home loan security allows the lending institution to be repaid as a priority if the borrower can no longer meet their monthly payments, generally by having the financed property seized and sold.
Without this security, no bank would agree to release the funds needed for the purchase. The security is therefore an almost systematic condition precedent to the loan offer, just like borrower insurance. The cost of this security is added to the overall budget of the transaction, in addition to notary fees, and must be anticipated from the outset when preparing the financing plan.
The three main types of security
In France, three mechanisms account for most of the market: a surety provided by a specialized organization, a conventional mortgage registered by a notary, and a lender's lien, reserved for certain transactions. Each follows a different logic, with costs and formalities that vary significantly from one solution to another.
Bank guarantee: the most widely used mechanism
How a guarantee through an organization such as Crédit Logement works
A bank guarantee consists of having the loan guaranteed by a specialized organization, the best-known being Crédit Logement, which acts as guarantor to the bank in the event of the borrower's default. Unlike a mortgage, no notarial deed is required: the process is faster and less expensive, which explains why the majority of home loans in France are now secured in this way. If the borrower can no longer repay, the guarantee organization compensates the bank, before potentially seeking reimbursement from the borrower for the amounts owed.
The cost of the guarantee and the mutual guarantee fund
The cost of the guarantee generally consists of two elements: a commission permanently retained by the organization, and a contribution paid into a mutual guarantee fund (FMG). This second component, which often represents the majority of the amount paid when the guarantee is taken out, is used to pool the risk among all borrowers guaranteed by the organization.
An important point to know: part of the amounts paid into the mutual guarantee fund may be returned to the borrower once the loan has been fully repaid, provided that no payment incident has resulted in the organization's intervention. The refund rate varies over time and depending on the organizations, but is generally between 70% and 75% of the amount paid into the fund. This refund is neither automatic in terms of its amount nor guaranteed in principle, since it depends on the organization's policy at the time the loan is finally repaid.
The conventional mortgage: a more formal form of security
Definition and implementation
A conventional mortgage is a security interest that directly covers the financed property, or another property already owned by the borrower. It must be established by a notarial deed and registered with the land registration service, making it enforceable against third parties. In the event of non-payment, the bank can have the mortgaged property seized and sold in order to recover its money from the proceeds of the sale.
Notary fees and land registration fees
The conventional mortgage is the most expensive of the three forms of security, as it combines several cost items: the notary's fees for drafting the deed, the registration duty, the real estate security contribution and the land registration tax related to registration with the land registration service. In total, these costs commonly represent between 1.5% and 2% of the amount borrowed, a level significantly higher than that of a standard bank guarantee.
Release of the mortgage in the event of resale or early repayment
If the property is resold or the loan is repaid early before the scheduled maturity date, the borrower generally has to have the mortgage registration released through a release deed, also drafted by a notary. This formality represents an additional cost, estimated on average at between 0.3% and 0.6% of the initial amount of the secured loan, calculated on the capital originally borrowed and not on the outstanding capital. However, if the property is kept until the normal end of the loan, the registration automatically expires approximately one year after the final payment, without any action or fees payable by the borrower.
The lender's lien (PPD): an alternative for existing properties
A security reserved for purchases of existing properties
The lender's lien, now technically known as a special legal mortgage of the lender of funds, works like a mortgage but benefits from a more favorable tax regime. Its particular feature is that it can only secure the purchase of a property that already exists at the time of the sale: it is therefore excluded for the purchase of a new home, a property under construction or a VEFA purchase, as well as for financing works.
Why the PPD costs less than a mortgage
The essential difference from a conventional mortgage lies in the tax treatment: registration of the lender's lien is exempt from land registration tax, unlike a standard mortgage. The overall cost of the PPD, which includes notary fees, the real estate security contribution and formalities fees, is generally between 0.5% and 1% of the secured loan amount, making it a significantly less expensive option than a conventional mortgage for an eligible borrower. As with a mortgage, a release of the security remains necessary in the event of resale or early repayment before the end of the loan term.
Comparison of the three home loan security options
Bank guarantee: advantages and disadvantages
- Advantages: quick implementation, no notarial deed, often lower cost than a mortgage, possibility of recovering part of the amounts paid into the mutual guarantee fund at the end of the loan.
- Disadvantages: depends on the application being accepted by the guarantee organization, which applies its own solvency criteria in addition to those of the bank.
Conventional mortgage: advantages and disadvantages
- Advantages: applicable to all types of projects, including new-build properties, construction or works, and to all types of property, including properties already owned by the borrower.
- Disadvantages: high setup costs, mandatory involvement of a notary, additional cost if the mortgage is released before the normal end of the loan.
Lender's lien: advantages and disadvantages
- Advantages: lower cost than a conventional mortgage due to the exemption from land registration tax, equivalent protection for the bank.
- Disadvantages: reserved exclusively for the purchase of an existing older property, excluded for new-build properties, VEFA and works, release to be arranged in the event of an early resale.
How to choose the right security for your profile or project
The type of property being financed often determines the choice
For the purchase of an existing property, the lender's lien is generally the most economical solution, provided that the bank accepts it, which is not systematic depending on the institution. For a new-build purchase, a VEFA or a project including works, only a bank guarantee or a conventional mortgage remain possible, with the former most often preferred because of its lower cost.
The borrower's profile also matters
A strong application, with stable income and a comfortable down payment, is generally accepted without difficulty by a guarantee organization, making the bank guarantee particularly suitable. Conversely, an atypical profile refused by the guarantee organization, an investor who already owns several properties mortgaged with the organization, or a specific wealth-management structure may lead the bank to favor a conventional mortgage.
Anticipating a resale or early repayment
If a resale in the medium term is being considered, it is useful to compare the total cost of each security by including the potential release of the mortgage and the possible refund from the mutual guarantee fund for the bank guarantee. Before signing a loan offer, it may be relevant to obtain a free property valuation of your current property in order to accurately assess your overall project, both purchase and resale.
Conclusion
The bank guarantee, conventional mortgage and lender's lien all serve the same purpose: securing repayment of the loan for the bank, but with very different costs and rules depending on the type of property and the borrower's profile. In most cases, the bank guarantee remains the simplest and most economical solution, while the PPD is an interesting alternative for existing properties and the mortgage remains useful for projects that do not fit into any other category. Before approving a loan offer, it is recommended to compare the different options with your bank or broker, and to seek assistance from a local Capifrance real estate advisor to secure the entire project, from finding the property through to financing.
FAQ
Can you change the security during the loan term?
It is generally not possible to replace security that has already been put in place without refinancing or renegotiating the loan with another institution. In that case, new security is established for the new loan, with its own fees. It is therefore preferable to choose the right security from the outset rather than considering changing it later.
Is a bank guarantee always cheaper than a mortgage?
In the vast majority of cases, yes, particularly because it avoids the notary fees associated with a mortgage deed. It also offers the possibility of a partial refund of the amounts paid into the mutual guarantee fund, which a mortgage does not provide. The PPD nevertheless remains competitive compared with a bank guarantee for certain profiles, particularly for existing properties.
Is the lender's lien accepted by all banks?
No, some banks systematically prefer a bank guarantee or a mortgage and do not offer the PPD, while others readily apply it to existing properties. This depends on the agreements made with guarantee organizations and the internal practices of each institution. It is advisable to check directly with your bank or broker before signing the loan offer.
What happens if I stop repaying my loan?
With a bank guarantee, the guarantee organization repays the bank on behalf of the defaulting borrower, and may then seek reimbursement from the borrower for the amounts advanced, including through an amicable or judicial procedure. With a mortgage or PPD, the bank can directly have the property seized and sold in order to recover its money from the proceeds of the sale. In both cases, it is essential to notify your bank as soon as the first difficulties arise in order to seek an amicable solution, such as restructuring the loan.
Do you need to choose the same security for a rental investment?
The choice of security for a rental investment follows the same logic as for a primary residence: the type of property, existing or new, and the investor's profile remain the determining criteria. Investors making multiple acquisitions must nevertheless monitor their overall debt ratio and the risk assessment carried out by guarantee organizations, which may become more demanding beyond a certain number of outstanding loans. Support from a professional makes it possible to anticipate these situations, for example by using our property listings to refine an investment project suited to their profile.
Author
Frédéric Rémy – Director of Sales Performance
A real estate professional with several years of experience within the Capifrance network, I would like to share essential advice with you to help you successfully complete your property project with our advisors.
