As featured in the April 2014 edition of French Property News
Financing a French property purchase with a mortgage is becoming increasingly popular, and not just because of the great rates on offer, as Clare Nessling explains
In the past, many British buyers of French property have financed their purchase by using the equity in their existing UK home, which has effectively enabled them to pay with cash. As the French mortgage market has become more developed, however, competition among French lenders for overseas business has moved apace. And a timely combination of excellent lending conditions means that there’s probably never been a better or more affordable time to borrow for your French property purchase.
Excellent lending conditions
Mortgage rates are still at their lowest in decades and at the time of writing, deals start at just 2.1% for a variable mortgage over 10 years, and 3.75% for a 25-year fixed-rate mortgage. And unlike many countries where the best rates are limited to those with the biggest deposits, both of these deals, and many others, are available for mortgages of up to 80% loan-to-value.
For buyers with deposits of at least 15% there are a range of deals available, which starts at just 3.05%.
The fact that loan-to-value levels are still this high is a reflection of how stable the French mortgage market is, and has been throughout the recent global downturn. Lenders have found themselves in a relatively strong position thanks to the caution they have exercised in the past.
Mortgage types are pretty similar to those available in the UK, so there’s usually a good choice of capital repayment or interest-only options, and rates can be fixed, capped or variable.
Rental income for mortgage repayments
Generally speaking, we recommend that a French mortgage and the income used to service the mortgage repayments are in the same currency, thus avoiding exchange rate issues. This is good news if you’re planning to rent out your French property, as the rental income will be in euros.
Taking out a euro-denominated mortgage can therefore make a lot of sense as the rent received can be held in a French bank account to service the monthly mortgage payments, thus avoiding the fluctuation in currency, and the associated cost, when transferring euros back to the UK each month.
French lenders tend to base the amount of money you can borrow on your actual earnings and your existing financial commitments, but an additional benefit of renting out your property is that a percentage of the rental income can be taken into account by the lender when calculating how much they’re willing to lend you. So make sure you inform them of your intentions at the application stage.
Peace of mind
As part of the mortgage process, the French lender will carry out its own checks on the property you want to buy, ensuring that a proper legal title exists, that the property is registered in your name and that a valuation takes place. The valuation will point out any problems such as subsidence, damp, wiring defects, and could also highlight any possible boundary disputes.
These crucial checks can provide you with peace of mind and will save you the time and expense of having to arrange them yourself.
Borrowing to pay for your French property can also bring some welcome tax benefits. For example, it may reduce your inheritance tax liability as there is a debt on the property. And if you plan to rent out the property, that income can be offset against the loan for tax purposes.
As ever, it pays to seek professional tax advice so that you’re fully compliant and to take advantage of all the possible deductions.
A good rate, and more
There is so much more to borrowing than just a good rate. Buyers are in a strong position, there’s no doubt about that. But this isn’t just because of low property prices and opportunities for negotiation with motivated vendors. The cost of borrowing is at a historic low, and it may never be more affordable to take out a mortgage. It could pay to act quickly, however, as although the best offers are still available, they won’t last forever and it’s likely that the next move in interest rates will be upwards.
Buyers’ affordability is being further boosted by the stronger pound. At the time of writing, the value of sterling has risen against the euro to €1.21, up from just €1.14 last summer. When you consider the difference this makes to a property purchase, it’s pretty big. For someone looking at a French home worth €200,000, this will now cost £165,289 compared with €175,439 in August 2013. That’s a saving of £10,150.
This is the same, of course, whether you’re a cash buyer or borrowing to pay for the property, but is still a welcome addition to the affordability equation.
Contrary to popular belief, arranging a French mortgage can be pretty straightforward and quick. The application process takes an average of six to eight weeks, and sometimes even less. It pays to be prepared with your paperwork and to have your accounts in good order, as lenders will want to see details of your income and outgoings.
The first thing you should do, however, is obtain an ‘approval in principle’ which will tell you how much you can borrow and it can lead to your application being fast tracked once you’ve chosen your property. It’s also worth considering a specialist mortgage broker, who will search the market for the best deal, which could save you time, cost and hassle.