Interest rates are low, the real estate market is down in some sectors, the time seems particularly appropriate to invest in stone. But how to finance your real estate purchase? Do you have to favor your personal contribution or take out a loan and get into debt as much as possible?
When you buy real estate, you have two options: tap into your available savings or buy a loan for a little longer. There are several factors to consider when making a wise choice, including the mortgage rate and the return on low risk investments.
Mortgage rate vs. return on low-risk investments
Borrowing has never been so inexpensive. Indeed, today, mortgage rates are at their lowest historical level. In fact, a buyer with a good record can easily obtain a rate of about 1.30% by borrowing over ten years or about 2.00% over twenty years (according to bettertales.com).
At the same time, returns on risk-free investments are declining. That of euro funds in life insurance reached, on average, 2.5% in 2014, against 2.7% in 2013 (source: FFSA). However, the best life insurance contracts still make it possible to obtain a return on the euro fund of more than 3%.
Optimize your contribution
You need to consider the banks’ borrowing requirements. Since banks do not lend much to 110%, the buyers must at least finance the notary fees to obtain their loan (about 7.1% of the price of your real estate purchase.) For a property with a value of € 500,000, the notary fees amount to about € 35,500.)
The safest way to get the best possible rate is still to benefit from a good contribution. If the latter is a bit limited, the most prudent is to tap into your savings to reassure your banker. In this case, use in priority your booklets or regulated investments which are low remunerated (Livret A and Account savings home are remunerated less than 1%), your business savings and, as a last resort, your life insurance according to its prior tax.
Anyway, keep a precautionary saving especially if you benefit from a consequent contribution. The smartest way will be to lengthen the duration of your mortgage for a while without affecting your life insurance for example. In fact, borrowing has never been so attractive and interest rates are fixed for the duration of the loan, which is not the case for the fund’s return in euros.
Borrow as much as possible
Withdrawals made on a life insurance policy have tax consequences that vary according to the age of the contract. Think about it when you sacrifice your contract on the altar of real estate purchase! Indeed, this feature can considerably increase the cost of the operation. In fact, before the end of the fourth year, the accumulated gains are included in the income tax or taxed at 35% in the event of withdrawal of cash and at 15% between the fifth and the eighth year. After eight years, they are exempt within the limit of € 4,600 for a single person or € 9,200 for a couple, and beyond, included in the income tax or taxed at 7.5%. In addition, in all cases social security contributions of 15.5%.
It is better to borrow more and not to touch your life insurance policy. By borrowing to the maximum, you will enjoy the currently very attractive rates of real estate loans. These are proving to be a real tax advantage that is neither limited nor limited in time.
A private investor will have even greater interest in borrowing the maximum because, in the context of the purchase of a rental property, the borrower can deduct from his property income the interests of the loan used to purchase the property.