If you’ve read our recent articles or have been carrying out your own research, you’ll know that French fixed-rate mortgages are available at very low rates. However, fixed- rate mortgages tend to charge borrowers heavily if they want to make over-payments or a full, early redemption.
Due to the unpredictability of foreign exchange rates, you may be looking for a mortgage with a bit more flexibility. In this case, the obvious option is to take out a ‘variable’ or ‘floating’ rate. In France, these mortgages tend not to penalise lump sum overpayments – providing that you’re injecting capital that’s over 10% of the original loan, banks are happy to redeem the mortgage early without penalising you. This means that you’ll be able to come out of the mortgage penalty-free before the term is up. This is often the right option for British buyers and is very worthy of consideration, yet it’s also important to be aware of how such mortgages in France differ from those in the UK.
In the UK, a ‘variable rate’ mortgage will be linked to a ‘base rate’. As the base rate fluctuates, the interest applied to the mortgage changes and the monthly repayments rise or fall. For example, UK base rates fell sharply after the credit crunch of 2008 so numerous borrowers saw their monthly repayments fall as their mortgage rates dropped with each base rate cut.
In France, variable rate mortgages are invariably linked to the three-month ‘Euribor’ rate. As this changes, the banks will calculate the effects on the interest you owe. However, there’s one issue that tends to confuse British borrowers with these type of French mortgages: even if there are major base rate changes, the monthly repayments will often remain almost exactly the same. Why? Well, French banks don’t think it’s healthy or fair to significantly change borrowers’ mortgage payments on a month-by-month basis. Instead, they reflect the base rate fluctuations by extending or reducing the term (length) of the mortgage by up to five or seven years.
So if the base rate rises significantly, you may end up paying mortgage instalments for longer than originally expected, but if they fall, everything will be paid off much quicker. This system offers a clear benefit for borrowers. Despite your French mortgage being variable and subject to change, you’ll still be able to forward-plan your monthly finances as the repayment amount will remain stable. The only slight change to this outgoing may be in line with the rate of French inflation, so it’s always best to check this before deciding on the final product. An independent broker will be able to talk you though the available options.
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