Behind each mortgage, there are three distinct parts: the borrowed capital, to which the interest rate and ancillary costs are applied (application fees, guarantees, insurance, prepayment penalties, notary fees).
This is why when you borrow 200,000 dollars, nobody reimburses only this amount. Find out the elements (negotiable or not) that integrate the overall cost of any mortgage and the importance of looking carefully at the Annual Effective Annual Rate (APR).
What should be taken into account when calculating the cost of credit?
The mortgage is not only limited to repayment of the loan taken out. Different elements increase their overall cost and must imperatively be taken into account in your calculation:
Subscribed to a bank, the mortgage is intended to immediately lend the borrower a reserve of money for the purchase of property – apartment or house of his choice. In exchange, the latter undertakes to repay it, month after month, of the capital borrowed, with interest.
This famous nominal interest rate, currently historically low, built on the basis of the financial markets (the 10-year Treasury Assimilable Bond, for fixed rates and Euribor for variable rates) and the borrower’s profile. The “premium” profile is the one that offers the least risk to the bank: in fact, it will benefit from the most attractive rate.
TO NEGOTIATE. Make the competition play, offer a solid file, reassure the bank to get the best offer.
Beware of the penalties for early repayment, established at 3% of the capital remaining due. Calculated on the basis of the average interest rate on the loan, they can be reduced or even eliminated for “premium” profiles.
When taking out a mortgage, the majority of banking establishments charge administration fees, which can range up to $ 1,500. Established according to the type of loan and the bank, they can be either fixed or proportional up to 1% of the credit amount.
Taken from the establishment of the credit, this cost corresponds to the analysis of the loan application file. If these costs can be logically claimed, as such, whether the loan is granted or not, most banks do not charge them in case of credit refused.
TO NOTE. To welcome new customers, an establishment is often ready to lower the administrative fees, or even cancel them. Be careful, do not negotiate them systematically, especially if the bank has already offered an excellent interest rate.
Before lending money, the bank requests collateral to avoid delinquencies. Guarantees which can be of three kinds:
- The mortgage. In other words, in the event of default, the bank can seize the property in question, to sell it to the highest bidders. This procedure requiring the appearance before a notary, this entails a cost equivalent to 2-3% of the amount of the loan.
- The privilege of money lender (PDD). Applicable only on old dwellings, it offers the same guarantees as to the mortgage, while being slightly cheaper (about 2% of the loan)
- The caution. Call on a third-party organization to act as a guarantor in exchange for the payment of approximately 2% of the credit amount.
Death, disability and job loss insurance
Our home loan insurance compulsory? No, they are all optional in France.
However, if disability death insurance is not legally required, it is traditionally required by banks. The only way not to subscribe is to pledge your mortgage. In other words, authorize the bank to seize investments and securities to reimburse itself.
It is also possible to subscribe to another organization, since 1 September 2010: this insurance allows delegation of ensuring competition and optimize bids.
Billed each year, its cost varies between 0.2 and 0.8% of the credit amount for borrowers under 65 years of age. Note that the higher the capital borrowed and the duration, the more useful this insurance i since it releases the heirs from these repayment obligations.
Like disability death insurance, “loss of employment” insurance is in no way compulsory: however, some banks may impose it, depending on the profile of the borrower. Partial or total, immediate or with a waiting period, each establishment freely sets its conditions for triggering this insurance, the cost of which varies between 0.10 and 0.70% of the capital borrowed. Better to study the clauses of the contract, with its exclusions, before signing it.
TO NEGOTIATE. Freely set (even if it is capped), the cost of insurance must be compared with other organizations, in order to keep the best offer.
Costs (notary, broker, real estate agency)
The validation of the real estate transaction must pass before a notary, causing significant costs. Rising between 4 and 8% of the value of the property, they significantly increase the overall cost of the credit and are mainly intended for the tax authorities, for registration fees.
It also involves paying the fees of intermediaries:
- Brokers. Depending on the professionals contacted, some claim from borrowers brokerage fees, others are free brokers
- Real estate agencies. Negotiated between the seller and the agency, these agency fees (or “fees”) range from 3 to 10% of the value of the property, knowing that the higher the price of the property, the lower the percentage.
The APR, a key indicator of the overall cost of credit
The Global Effective Rate (TEG) or the APR includes in its calculation: the nominal interest rate (ie the rate put forward by the banks to attract customers) and the “fees, taxes, commissions or remuneration of any kind, direct or indirect, borne by the borrower and known to the lender ”, in accordance with article L314-1 of the consumer code. In other words, notary fees are not included in this calculation.
What are the elements included in the APR?
In fact, the APR must legally include :
- Application fee
- Broker fees (if any)
- The cost of insurance
- The cost of the warranty
Note that, since 2016, if the bank requires the opening of a bank account, the APR must also include the costs inherent in its management (opening and maintenance), as well as in payment and direct debit operations.
Please note that the elements taken into account in the APR should be carefully checked, as there is a great deal of case law surrounding its calculation.
In all cases, the APR cannot exceed the rate of usury, fixed each quarter by the Banque de France and must be indicated on the credit proposals, just like in the contract.
Incorrect or absent APR cases
In the absence or error of APR in the official documents issued by the bank, the latter risks a fine of $ 150,000 (L 341-49 of the Consumer Code) and the substitution of the legal interest rate for contractual interest rate, since the origin of the debt, on all or part of the debt.
Pursuant to article 110-4 of the commercial code, modified by the law of June 17, 2008, the limitation period is 5 years. The latter runs from the date of the contract for an absent APR and since the revelation of the error for an incorrect APR.