Remortgaging

Remortgages Available in France for the First Time

David Anderson, a specialist in French Taxation, highlights an important change in French law with the 'Hypothèque Rechargeable'.

There has recently been a comprehensive review in France of the rules relating to mortgages which is contained in Ordinance 2006-346 of 23 March 2006. Many of these have important legal implications but one of the major practical changes is the “Hypothèque Rechargeable” or “refillable mortgage”.

By way of background, it has historically been difficult and expensive to remortgage in France. This has been a largely political decision and is part of the reason France has not seen the kind of housing price bubbles experienced in the UK. This has now changed and it is likely to fuel increases in prices as French property owners release equity to purchase further properties.

Changes in the Law

The new rules allow borrowers to enter into mortgages which can be used to guarantee loans other than the initial amount borrowed. They go further in their flexibility than the equivalent UK mortgages because they allow the same registered mortgage to be security for loans from different banks, which is highly innovative.

It is important at the outset to understand that, as in England, a mortgage is a charge registered against the property and is legally separate from the actual credit obtained. Most people see the mortgage and the amount they borrow from a bank as one and the same thing which is incorrect both in England and France.

Almost all mortgages in France are for fixed amounts with the mortgage or security over the property being for that amount loaned, plus interest. The security given by the mortgage borrower cannot usually extend to further borrowings.

But the “Hypothèque Rechargeable” changes all this. The initial mortgage can guarantee future borrowings up to a limit stated in the original mortgage deed. This stated amount is however likely to have notaires’ costs implications. Most importantly any new borrowings do not have to be with the same bank. This was inserted in the legislation to encourage competition between banks and is to be welcomed.

It is accordingly possible to have an initial loan from one bank still outstanding when you take another loan from a second bank. The second bank’s mortgage will be subject to the first bank’s mortgage. The second bank may be very wary of getting involved, especially if the first mortgagee could secure further credit - this is not likely in residential property but quite possible for commercial loans.

The “Hypothèque Rechargeable” is available for any purpose, business or private. If, however, a 'consumer' is involved (within the meaning of the “Code de la Consommation”) then additional rules are involved. These are the usual cooling-off and advertising rules. The mortgage deed has to explicitly provide that it is rechargeable. Existing mortgages can be changed to rechargeable ones by adding suitable wording which will need agreement of the borrower and lender.

Costs Drawback

One of the drawbacks of the new mortgages is that they have to be by way of a “legal mortgage”, which means that higher costs are involved because Land Registry fees have to be paid (taxe de publicité foncière).

Often, on residential property, loans are secured not by way of a legal mortgage but by way of 'privilege' known as 'le privilege du prêteur de deniers'. This is a form of French mortgage which does not exist in England but is widespread in France. The notaire’s fees for a privilege du prêteur de deniers are significantly less than for a mortgage, which means that notaire's costs will be an issue holding back the use of the Hypothèque Rechargeable.

In addition, notaire's fees are normally based on the highest amount stated in the mortgage deed. This means that you are likely to have a higher amount to pay when you buy the property and take out a Hypothèque Rechargeable as you will inevitably want the highest figure possible in the deed to facilitate further borrowings if you need them later.

Any further loan either with the same or a different bank will have to be registered at the Land Registry in a simplified form which will involve further notaire's costs although considerably less than a fresh mortgage. Notaire's fixed costs for mortgages which includes their fees plus land Registry charges were reduced slightly at the same time but are very high compared to the UK. These costs are effectively a tax on raising capital and need to be considerably reduced.

David Anderson, tax partner at Sykes Anderson LLP, is a solicitor and chartered tax adviser specializing in French Taxation.

David Anderson Sykes Anderson LLP
Bury House, 31 Bury Street,
London EC3A 5JJ
Tel 0044 (0) 207 398 4700
danderson@sykesanderson.com

Please note that the information herein is of a general nature and you should not act or refrain from acting on it without professional advice on the specific facts of your case. Taxation and law are complex subjects and the information herein is intended only for general information. Nothing herein constitutes financial advice.
June 2006