Today is:
Service France
A conversation between David Anderson solicitor and chartered tax adviser at Sykes Anderson LLP London and a retired English owner of a French property about the new " prêt viager hypothécaire " which is a French form of equity release.
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.
Q: What is " le prêt viager hypothécaire "?
A: This is a new innovation in France and is similar to equity release loans in the UK. The new law allowing these loans has been passed and products will start to be sold shortly by the major French banks and other credit companies.
Q: So these are aimed at the elderly who are equity rich but income poor?
A: Yes. The typical customer will own their home in France and be willing effectively to mortgage it to get either a capital advance or an income stream normally for the duration of their lifetime. On their death in many cases their children will not inherit their parents' house because it will be taken by the credit company which has paid out the advance of capital. If the death occurs earlier than expected then the heirs will of course receive any equity left in the property after repayment of the loan and interest. This product has not been available in this form before in France as there was no legislation to provide for it.
Q: I recall these schemes got a bad press in the UK.
A: Yes, with widespread allegations of mis-selling. Hopefully this will not happen in France but people being sold these schemes should be very sceptical. If in any doubt take your time, do not be pressurised and get independent advice.
Q: What are the alternatives?
A: The traditional vente en viager is always an option. Under this arrangement you sell the property to usually an individual who pays you a lump sum called a "bouquet" and then pays you an income for life, a " rente ". These are typically organised by notaires for older clients. The " prêt viager " allows the lending institutions to get involved in this market for the first time. Interestingly, only corporate lenders can be the financiers in a " prêt viager " which does not make sense as it excludes smaller businesses from the market and reduces competition.
Q: So why don't I just go down the traditional rente en viager route?
A: I suggest you always see if there is a buyer on terms which are acceptable to you. The drawback is that you may have to wait for a buyer and the buyer may not have the cash available if you want the money as a lump sum rather than a monthly payment. The other difference is that you will have sold the property so if you were to die shortly after entering into a traditional rente en viager your heirs would be much worse off than if you had entered into a prêt viager because much of the equity in the house would remain as little interest will have accrued. Other considerations will also be relevant.
Q: How does it work?
A: The credit company will put a mortgage on your house. The law provides that only residential property is allowed and that the loan must be used for living expenses and cannot say be used to start a business. The loan is an " in fine " loan which means the capital and interest is only payable at the end of the term. This is broadly when the borrower dies or sells the property. The capital is then advanced either as a lump sum or by periodic payments as agreed. It is open to the borrower to have the payments rescheduled.
Q: How does the credit company get paid?
A: On the death of the borrower the capital and interest outstanding will have to be repaid by the heirs. The important provision in the law is that the total amount outstanding cannot exceed the value of the property at the date of death. In other words these loans cannot of themselves make the borrower's estate insolvent.
Q: You mentioned mis-selling. What protections are there?
A: A lot of formalities similar to those you have in France when you get a mortgage. The borrower at the outset must receive an offer letter with a valuation of the property carried out by an expert valuer. If he is to receive one lump sum then he must be told when the capital and interest are likely to exceed the value of his property. This of course is when the credit company expects him to be dead! He has 10 days cooling off period. There are also controls on how the loans can be marketed. Finally, the documentation must be signed before a notary which is a very useful protection when elderly people are involved. The " prêt viager " is to be welcomed provided the credit companies involved in this market act fairly and responsibly towards elderly people and ensure that companies which act abusively are quickly identified and forced to leave the market.
June 2006