Equity release in France is a pressing question for many French homeowners and we have many clients that contact us for help in arranging a French Equity Release Mortgage or, occasionally, asking for information on Viager Sales.
Prior to the Mortgage Act 2006, equity release in France was considered impossible. Following the implementation of this legislation considering the release of equity is a more attractive prospect for both individuals and lenders.
The current property market does not currently present the most favourable financial environment and along with the recession and its knock-on effects banks are not keen to develop this market. However, the legislation is now in place and allows for releasing equity and eventually raising more liquidity from real estate, something that historically been very difficult in France.
Legal Framework for Equity Release in France
Until now French mortgage law was captive to the fact that a charge taken against a property had to be specific to one debt only. Article 2422 of the Code Civil introduces flexibility by allowing the initial priority of an original loan to apply to further advances. In effect, this will allow borrowers to ‘top-up’ a charge taken against a property.
The advantage of the reform lies in the fact the new loan can take priority over previous loans.
French banks have been uneasy about equity release in France and foreign banks tend to be even more cautious. The Mortgage Act brings France closer to the approach that is already followed in other jurisdictions.
To set up a loan with a ‘top-up mortgage clause’ would require the clause to be expressly inserted into the mortgage deed; it is not implied.
It can be used by individuals or companies and would need to include information such as:
- the amount of the loan;
- the amount of the subsequent loans that might be required;
- the maximum amount guaranteed;
- estimation of the costs;
- and the period for the charge against the property and the property description.
There should also be express provisions that if the loan is not repaid it can trigger the repossession of the property. This will be published through the Land Registry and the ‘top-up mortgage clause’ will put third parties and creditors on notice of the fact that if further loans by the original lender are granted they will take precedence.
It is possible to use the top-up mortgage clause to secure a greater loan than the initial one.
The priority provision for a ‘further advance’ over and above the amount borrowed on the initial loan lasts for one year after the end of the loan period with a maximum of 50 years from the day the charge was registered through the Land Registry.
The charge will not be extinguished automatically once the initial loan is re-paid and can be re-used by the same bank for another loan, or by another creditor.
The Notaire will play a major role in this process as it will be his responsibility to advise his clients on the economic aspect of the guarantee taken, verify the value of the property and the amount of the mortgage. It is important for a Notaire to advise his clients of any consequence if the amount lent was to exceed the value of the property. It is common that an owner would want to speculate on his property and over value it.
When the Notaire is instructed to top up the mortgage at a later stage, it will also be his responsibility to identify the current debts on the property to make sure that any new lender will be able to obtain a secure charge on it.
However, though French law now provides a framework for equity release mortgages French banks impose many restrictions so they are only an option for a small class of borrowers.