Real estate loan repurchase and rental investment, how does it work?

What is the repurchase of a mortgage?

This term applies to two situations:

- A one-time loan repurchase from another bank in the event of a fall in interest rates, for example

- In the context of a grouping of several loans as long as they include 60% of real estate loans.

How does a mortgage repurchase take place?

To buy back loans, involving competition between banks, always looking for new customers, makes it possible to obtain more favorable conditions. Rules exist for judging the advisability of a takeover:

- a fairly high outstanding capital

- an amortization period of less than half

- a difference in the credit rate of around 1 point

Once the conditions have been negotiated and the file is completed, the bank repays all loans in advance from the various financial organizations. She is setting up a new single credit, replacing all the old ones. It is practiced at a fixed rate, in a single monthly payment and over a fixed period between the borrower and the banking institution.

Buying a loan to invest in rental real estate

Rental real estate is a source of additional income that appeals to French people. But how do you finance a rental investment when you already have several loans? The bank will carefully examine the financing file taking into account income, but also the repayment of current loans. Personal loans, real estate and consumer loans may prove to be an obstacle to the realization of your project if your debt ratio is greater than 35%.

Buying a mortgage can be the solution to obtain the agreement of the bank and flexibility in your budget. Credit consolidation allows:

- to obtain a cheaper rate, especially if your consumer loans are often at higher rates;

- to restructure debts and to adapt expenses to income;

- reduce the monthly payment;

- reduce the debt ratio by extending the duration of the credit.

The purchase of a mortgage also allows for simpler management with a single banking institution and a precise vision of the financing capacity before taking out a new loan.

The improvement of the debt ratio and the restructuring of all debts make it possible to finance rental investments.

Repurchase of credit with cash for investments in real estate

Repurchasing credit with cash is another option to consider for real estate investments.

While combining several loans under a single monthly payment, it makes it possible to request additional cash in order to finance a new project. This cash flow requirement is added to the amounts of the loan consolidation. The advantage is that it allows you to use only one and the same loan. The single monthly payment includes the amount of cash required to finance the real estate investment.

Conditions exist to be able to benefit from this cash flow:

- it is limited to 15% of the total amount of credit repurchases

- the ability of the borrower to bear the weight of this additional burden and its guarantees in order to obtain the bank's agreement and respect the maximum debt ratio of 35%.

- as cash is allocated to a real estate project, the amounts requested must be justified at the time of the loan repurchase request.

Can you maintain the advantages of real estate loans in the event of a credit repurchase?

The repurchase of an ongoing loan may in some cases lead to the loss of advantageous conditions, especially in the event of tax exemption if the conditions are not met.

- Case of conventional loans: Zero interest loan (PTZ), 1% loan, loan for social action: they cannot be repurchased under penalty of losing free or subsidized rates.

- Case of tax advantages linked to a real estate loan in the rental sector

In the event of a loan repurchase linked to a tax exemption system (Pinel Law, Historic Monument, Malraux law, Censi-Boulevard, etc.), tax benefits are retained under certain conditions. The borrower can continue to deduct the interest on his initial mortgage under two conditions:

- the loan repurchase contract must stipulate that the new loan is intended to replace the original loan

- the property tax return must mention the repurchase of credit and the new loan as a replacement for the previous one. It is advisable to keep the supporting documents of the 2 loans in case of an audit by the tax services.

- the amount of interest deducted for tax purposes must not exceed the initial amount

What are the additional costs of a credit repurchase?

To assess the benefits of buying a mortgage, it is necessary to take into account all the ancillary costs of the transaction.

- early repayment benefits to be paid: they represent 6 months of future interest and cannot exceed 3% of the outstanding capital

- the administrative fees of the new bank, in theory 1% of the amount borrowed

- the cost of securing the new loan is different if the old guarantee is based on a mortgage or on a bank guarantee.

In the first case, notary fees apply for the discharge (around 2% of the outstanding amount) plus the amount of the new security to be paid.

In the second, 75% of the amount paid initially is recovered and makes it possible to finance the guarantee to be set up with the new bank.

Conclusion

Attention: a repurchased loan is always more expensive than an old loan, however the repurchase of a mortgage has many advantages and favors the financing of new acquisitions.

To find the most favorable solution, online simulations exist, but depending on your investor profile, it is sometimes wise to have a broker assist you with the financial arrangements.