Pledging your home as collateral: what are the implications and risks?

When an individual decides to pledge his or her home as collateral, he or she is allowing the bank to sell the property if he or she defaults on repaying the loan. Of course, this procedure is strictly regulated by Luxembourg law. So even if you choose this option for your loan, your house remains your property. The bank has no right, for example, to enter it without your permission, to choose who lives there or to collect rent.

So what does a guarantee mean for your home? What are the bank's rights in this scenario and yours? Don't hesitate to consult a property expert to get clear and appropriate answers to all these questions.

In what situations can you use your home as collateral?

Generally speaking, you put your house up as a guarantee when you buy a property and borrow money from the bank. This guarantee allows the bank to repossess the property if the borrower fails to make the monthly payments on time.

There are other circumstances in which a house can be used as collateral: some people choose this option when starting a business, as part of their professional development or to pay off a debt.

Of course, using your home as collateral does not necessarily guarantee the bank's approval. In any case, with or without a guarantee, the bank will examine your financial situation before deciding whether or not to support you in your property project. Among the various criteria taken into account are the amount of your monthly income and your personal, family and professional situation.

The guarantee can be given by a member of your family or on a property other than your house: you can, for example, put up a building plot or even a piece of farmland as a guarantee.

The main consequences of a mortgage

In some countries, such as the United States, the bank can repossess the property in the event of a problem. In Luxembourg and most European countries, the guarantee does not authorize the bank to take possession of your main or secondary residence, even if the monthly payments are not made.

If you fail to repay your loan in accordance with the original terms, the bank will generally first try to find an amicable solution. If no agreement can be reached, the bank may call in a bailiff to collect the outstanding amount. If a house guarantee has been given and the previous steps have not been successful, the notary may have to organize a public sale.

Some tips for obtaining a mortgage

Of course, the guarantee can make it easier to get the loan you need to complete your property purchase. But first, it's best to work out how much you can afford to repay each month and how much you can borrow in total.

In general, buyers are advised to get their finances in order before applying for a bank loan, with or without security. To demonstrate the strength of your case, avoid being overdrawn for months before applying. If you have outstanding consumer credit, try to pay it off as much as possible to reduce your monthly outgoings.

Do not hesitate to make several applications to different institutions to find the best deal for you. The help of a bank credit broker can be crucial at this stage: he or she will help you to compile a file, negotiate with the banks and determine whether or not it is necessary to put up the house as collateral.