Let the bank finance the property, and keep your savings invested

Leverage in one paragraph

Leverage means buying an asset mostly with borrowed money. It works when the asset earns more than the loan costs. On a rental property, the rent pays most of the monthly repayment, and after 20 or 25 years the loan is gone and the property is yours. If rents fall, or if rates rise above the property's yield, leverage works against you. That is why the choice of city and property matters as much as the loan.

Keep your savings invested: how the pledge works

The usual route is to put 20% or more of the price down as a deposit. That money is then tied up in bricks and mortar.

Many of our clients take a different route. Some banks agree to finance the whole project if you place an amount with them, often around 20% of the loan in the cases we handle, invested in a portfolio of, for example, global equity funds and pledged as security. You still own the portfolio and it stays invested. The bank releases the pledge as the loan is repaid or at the end of the loan, depending on the contract.

Your savings keep growing in the markets while the tenant pays down the loan.

Read the terms closely. Each bank decides which assets it accepts, how much it requires and what happens if markets fall. A pledge usually comes with a minimum value: after a sharp fall, the bank can ask you to top it up. We go through the offer with you and the broker before you sign.

A worked example over 25 years

Three ways to use the same €100,000. The assumptions are deliberately simple and prudent:

• Total project cost €500,000, for example a small apartment building or several apartments bought together: purchase price, notary fees, renovation and furniture.
• Rent of €2,500 a month, or 6% gross on the total cost. After management, insurance, property tax and an allowance for empty months (25% in total), €1,875 a month.
• Fixed-rate loan at 3.8% over 25 years, repayments shown without borrower insurance.
• Portfolio return of 5% a year. This is an assumption, not a forecast.
• No rent increase, no change in the property's value, before any tax.

Is the pledge really better? The honest comparison

In option C you top up €517 more each month than in option B. To compare like with like, imagine that in option B you invest that €517 every month in the same fund. After 25 years at 5% a year, that would grow to €302,741. Option C still finishes ahead, by €35,895.

The gap comes from a single source: the portfolio earns 5% while the extra borrowing costs 3.8%. Change the return and the answer changes:

So the pledge is not a free lunch. What it clearly gives you is a fully financed project, and savings that stay invested and diversified instead of being tied up in a single property. Whether it beats a classic purchase depends on how markets perform over the next 25 years, which nobody can predict.

Run your own numbers. Our IRR calculator compares both financing routes on your project, with a sale at the date you choose.

The risks, in plain terms

• Market falls. In euros and excluding dividends, the MSCI World lost 65% between September 2000 and March 2009, and 14% in 2022 alone. A pledged portfolio can drop below the bank's minimum and trigger a request for more collateral.
• Empty months and repairs. A month without a tenant or an unexpected repair increases your top-up. We build a reserve into every project budget.
• Interest rates. A fixed-rate French mortgage protects you once it is signed, but the rate you get depends on the market at the time.
• Currency. If you earn in US dollars, pounds or Singapore dollars and borrow in euros, exchange rates change the real cost of your repayments.
• Tax. Rent is taxed in France; your portfolio is taxed under the rules of your country of residence. Check both before you commit.

This page explains a mechanism. It is not investment, tax or legal advice, nor a promise of returns. Past performance does not predict future results. Have your own situation reviewed by a financial adviser and a tax professional.