Very popular with investors, the mortgage ultimately helps reduce the tax bill and has the advantage of being simple to operate. Its use is however reserved for rental investment and it is even strongly advised not to use this type of financing for the acquisition of the main residence. In addition, the loan in fine does not only have advantages. Detailed characteristics and explanations with our specialists.
Definition Operation Advantages and disadvantages Insurance Rental investment financing Principal residence During its life: renegotiation or transformation into an amortizable loan Simulation
The loan in fine is a mortgage, the principle of which is based on deferred amortization. During the transaction, you only pay interest and insurance. At the end of the loan, you repay the entire capital in one go. It requires backing up an investment transaction, most often life insurance, which will serve as a guarantee.
The functioning of the loan in fine
This is a special financing method since the capital is reimbursed all at once at the end of the operation, a bit like in the case of a bridging loan, but over the long term.
Payment of interest for the duration of the transaction
The monthly payment of the loan in fine is constant throughout the duration of the operation since, in the absence of amortization, the interest rate applies to the same amount of capital. The same goes for borrower insurance, regardless of the method of calculation (on the amount borrowed or on the principal owed).
Note that the difference between conventional credit is significant.
For example, for a loan of $ 200,000 at a fixed rate of 1.25% over 20 years (excluding insurance), the monthly payment is only $ 208 compared to $ 942 for a repayable home loan. To know: in the case of a purchase of a construction of an individual house, the banks sometimes propose to the investors a total deferred until the delivery of the accommodation. You don’t pay the capital or interest. The monthly payment only includes borrower insurance.
Return of capital at the end of the loan
The credit is repayable in fine, that is to say at the end of the operation, in one go. It is, of course, equivalent to the capital borrowed.
Important: in case of early repayment, you must pay penalties of 3% on the share of capital repaid.
Pledge of an investment for the benefit of the bank
Mortgage loans in fine are generally associated with a pledged investment transaction for the benefit of the lender. There is also talk of backing. This investment will eventually repay your loan and save you the usual guarantee costs (mortgage, IPPD or mutual guarantee).
You can pledge existing life insurance or take out a new contract with the lender. Note that other forms of financial investment may be accepted.
Ultimately, the value of the investment must cover the amount of the mortgage. Otherwise, the bank may require the borrower to provide additional collateral.
Namely: the loan amount can finance up to 100% of the transaction, the investor must, however, have the cash necessary to pay the notary fees.
Purchase of a new life insurance policy
The banker does not hesitate to offer, in addition, to financing, his own investment formulas, among which multi-support life insurance plays a large role.
Be aware, however, that here there is no question of trying to achieve a good level of performance because once the life insurance contract backed by the loan in fine, there is no question of taking the least risk.
The bank indeed requires that the capital be directly placed in a fund in dollars, the act of pledging also prohibiting the performance of any arbitration.
However, in rare cases, it accepts that part of the funds is invested in a financial asset comprising a share of stocks or bonds.
To determine the capital to back up the loan in fine, it is necessary to simulate the forward value of the contract on the basis of an assumption of return at the average rate of funds in dollars. For information, be aware that this rate was slightly higher than 1.80% in 2018.
You can add funds to your contract in three ways:
- By making a single payment.
- By making monthly savings.
- By mixing the two formulas: an initial payment plus regular payments.
Delegation of claims on an already opened life insurance contract
If you already have a life insurance policy, you can offer a delegation of debt. You just have to change the beneficiary clause and have the pledge agreement signed by the company managing the contract.
Important: this solution allows you to keep the tax history of the investment.
Other types of investment that can be backed by the loan in fine
It is possible to allocate other types of financial investment, subject to obtaining the agreement of the lender.
- PEAs and securities accounts, as soon as they are opened with the bank which grants the financing and when their amount is sufficient, that is to say, it takes into account the risks of the market downturn, can behave.
- People’s savings plans (PEP).
- Retirement savings, employee savings, and capitalization contracts.
If the sums pledged are deemed insufficient, the bank may impose on you an additional guarantee which may be real security: mortgage or privilege lender of money (we then speak of mortgage loan in fine) or a mutual guarantee such as housing credit.
Guarantee brought into play
In the event of default, the bank is called upon to put the guarantee into play, that is to say, to proceed to the redemption of the life insurance contract. In the event that the cash surrender value is lower than the amount of the mortgage and in the absence of additional collateral, it is entitled to obtain from the borrower the payment of the capital by legal means.
Advantages and disadvantages
The advantages of the formula
Leverage is the essential aspect of the loan mechanism in fine. The amount of interest to be deducted from property income is higher, which reduces property tax accordingly.
Lower monthly payment and savings effort
The monthly payment is lower than for a traditional mortgage since you only pay the interest, which therefore reduces your savings effort (1).
(1): corresponds to the part assumed by the investor to make up the difference between the amount of the rents and the monthly installment.
Savings on warranty costs
The life insurance contract serving as a guarantee for the loan ultimately saves the cost of a mortgage or mutual guarantee.
Life insurance return higher than the loan rate in fine
The rates of return on funds in dollars are currently higher than the rates of borrowings, even if the latter is higher than in a conventional loan.
And the disadvantages
The higher cost of credit
The cost of credit is higher for two reasons than:
- The interest rate is higher
- There is no amortization of capital.
Blocked placement contract
The act of pledging prohibits you from managing the contract as you wish. No withdrawals are allowed and in most cases, you are prohibited from making arbitrations.
Higher credit rate than on an amortizable loan
The loan rates in fine are higher than those of a conventional loan. This situation is still true in 2019 at a time when fixed rates are particularly low.