What is the true cost of a home loan?

Behind each real estate loan are three distinct parts : the borrowed capital, on which the interest rate is applied and ancillary costs (fees, guarantees, insurance, prepayment penalties, notary fees). That’s why when you borrow 200,000 euros, nobody only reimburses that money. Discover the elements (negotiable or not) that integrate the total cost of any real estate loan and the importance of looking closely at the Annual Effective Rate (APR).

What should be considered in calculating the cost of credit?

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Real estate credit is not just about repaying the loan. Different elements come to increase its overall cost and must imperatively be taken into account in your calculation:

1. The mortgage

 1. The mortgage

Subscribed with a bank, the mortgage is intended to immediately lend the borrower a reserve of money for the purchase of a property – apartment or house of his choice. In exchange, the latter undertakes to repay, month after month, 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 Assets 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. Play the competition, offer a solid record, reassure the bank to get the best deal.

Pay attention to penalties for early repayment, established at 3% of capital remaining due. Calculated on the basis of the average interest rate of the loan, they can be reduced or even eliminated for “premium” profiles.

2. Fees

 2. Fees

When subscribing to the mortgage, the majority of banks charge a handling fee of up to € 1,500. Based on the type of loan and the bank, they can be either fixed or proportional up to 1% of the credit amount.

This cost, taken at the time of credit introduction, 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 for credit refused .

TO NOTE. To accommodate new customers, an institution is often ready to lower the fees, or even cancel them. Be careful, do not negotiate them systematically, especially if the bank has already offered an excellent interest rate.

3. The guarantee

 3. The guarantee

Before lending money, the bank asks for guarantees, to avoid unpaid bills. Guarantees that can be of three kinds:

  • The mortgage. In other words, in case of default, the bank can seize the property in question, to sell it to the highest bidder. This procedure imposes the passage before a notary, this entails a cost equivalent to 2-3% of the amount of the loan.
  • The lender of deniers (PDD) privilege. Applicable only on old housing, it offers the same guarantees as the mortgage, while being slightly cheaper (about 2% of the loan)
  • The caution. Use a third party organization to vouch for the payment of approximately 2% of the credit amount.

DO NOT NEGOTIATE.

4. Death insurance disability and loss of employment

 4. Death insurance disability and loss of employment

Are home loan insurance mandatory? 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, allow the bank to seize investments and securities to pay them back.

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. Note that the higher the borrowed capital and the duration, the more useful this insurance is, since it releases the heirs from these repayment obligations.

Like disability death insurance, the “job loss” insurance is by no means mandatory : 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 . It is better to study the clauses of the contract, with its exclusions, before signing it.

TO NEGOTIATE. Freely fixed (even if capped), the cost of insurance must be compared with other organizations in order to maintain the best proposal.

5. Fees (notary, broker, estate agency)

Validation of the real estate transaction is imperative in front of a notary , causing significant costs. Rising between 4 and 8% of the value of the property , they significantly increase the overall cost of credit and are mainly intended for the tax authorities, for registration fees.

It’s also about paying the intermediaries’ fees:

  • Brokers . Depending on the professionals contacted, some claim borrowers brokerage fees, others are free brokers (as Hercule Poirot)
  • Real estate agencies . Negotiated between the seller and the agency, these agency fees (or “fees”) range between 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 APR, a key indicator of the overall cost of credit

The Total Effective Rate (TEG) or 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 do not fall under this calculation.

What elements are 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 guarantee

It should be noted that since 2016, if the bank requires the opening of a bank account, the APRC must also include the costs inherent to its management (opening and holding) as well as payment and direct debit transactions.

Attention, it is advisable to verify well the elements taken into account in the APR, because there is numerous case law around its computation.

In any case, the APR can not exceed the rate of attrition , fixed each quarter by the Banque de France and must be indicated on credit proposals, just as in the contract.

Cases of erroneous or absent APR

 Cases of erroneous or absent APR

In case of 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 in contractual interest rate, since the origin of the debt, on all or part of the debt.

Pursuant to Article 110-4 of the French Commercial Code, amended by the Law of 17 June 2008, the limitation period is 5 years . The latter runs from the date of the contract for a missing APR and since the revelation of the error for an erroneous APR.