Beginner’s Guide to French Mortgages

 

Essential Reading

Beginner’s Guide to French Mortgages

Whether you’re searching for your dream holiday home, investing in real estate, or planning to move to France—many buyers will choose to finance their property purchase with a French mortgage.

This beginner’s guide covers everything you need to know about French mortgages. What mortgages options are available to foreign buyers? How much will you be able to borrow and what are the lending criteria? What can you do to increase your chances of having your mortgage application approved?

Use this guide to get a general step-by-step overview of applying for your French mortgage, then follow the links to learn more about each stage of the process.

French Mortgages for Foreign Buyers

French mortgages can seem intimidating to foreign buyers, but French banks and lenders are often just as willing to consider international buyers. British and EU buyers can typically borrow up to 80% of the property value and with interest rates consistently lower than those of many other countries, a French mortgage can be a smart choice.

However, French mortgage lenders are historically quite conservative when it comes to granting mortgage financing and there are some aspects of a mortgage application that may differ from that of your home country. Loan to value (LTV) rates and eligibility criteria may also vary depending on your country of residence and your personal situation. It’s important to be aware of all these things before you start searching for a mortgage lender.

French Mortgages vs. Re-Mortgages

The first decision to make is whether or not you need a French mortgage in the first place. Unless you are looking to purchase a property outright, foreign buyers have two main options available to them. You can either take out a French mortgage on the property or you can remortgage your existing home in your own country, thereby freeing up the equity to purchase your French property outright.

Note that only French banks and lenders are able to arrange a mortgage secured against a French property. It is not possible, therefore, to take out a UK, American, or other mortgage on a French property.

There are advantages and disadvantages to both options. Taking out a French mortgage means you will be buying the property in Euros, which ensures the value of your mortgage will always be relative to the value of your property. For buyers from countries outside the Eurozone, this is a critical factor to consider. If the value of the Euro was to drop dramatically, you could be left with a mortgage that far exceeds the actual value of your French property, leaving you in a difficult situation if you chose to sell. French mortgages also typically offer lower interest rates than UK and American mortgages, and long-term, fixed-rates are available, making them an attractive choice.

However, remortgaging might be an option for those who want to avoid the risk of currency fluctuations over the term of the mortgage or who want to benefit from a favourable exchange rate at the time of purchase. Remortgages can be a simpler option and mean you won’t have to deal with additional paperwork and monthly payments in two different countries. For those who don’t meet the criteria to secure a French mortgage (more on that in a minute), they may also be the only option available.

Read our articles Remortgage vs. French Mortgages for foreign property buyers and UK or French Mortgage for British Property Buyers in France

Even if you have sufficient funds to purchase the property outright, it might be worth considering a French mortgage. Taking out a Euro mortgage can help avoid the pitfalls of unfavourable exchange rates, potentially reduce French income tax and wealth tax liabilities, and allow for smarter investment choices in your home country.

Read our article ‘I have the cash, why should I use a French Mortgage’.

How the Exchange Rate Affects Your French Mortgage

Another important factor that foreign buyers need to take into account is that of currency exchange. If you take out a French mortgage, you will be making your monthly payments in Euros. If the majority of your assets and revenue are in Sterling, US or Australian dollars, or another international currency, this means that the actual amount you pay each money will vary depending on the exchange rate. There’s no way around this for international buyers, but there are ways to protect yourself from sudden changes.

Setting up a currency exchange account with a company such as Moneycorp means you can monitor the exchange rates and choose to exchange money at the most beneficial time. If you’re making regular monthly payments, you can also use forward contracts to fix the exchange rate and minimise the risks involved.

Visit our Currency Exchange zone to learn more.

A weak exchange rate is also another good reason to consider taking out a French mortgage on a property purchase. Even if you have the capital for a cash buy, buying a property at a time when exchange rates are unfavourable could increase the actual cost of your property purchase by thousands of pounds or dollars. A smarter choice might be to take out a French mortgage and pay it off when the exchange rate moves back in your favour. Just be sure to select a mortgage type that allows you to do this—more about that later!

French Mortgage Eligibility and Conditions

French banks and lenders tend to be conservative and low-risk, so the barrier to entry is quite high for a French mortgage, especially for foreign buyers. To have your mortgage approved, you will need to present a strong financial profile and meet a number of criteria. Similarly, mortgage terms and conditions for foreign buyers vary from those available to French residents.

French Mortgage Conditions

What are the typical conditions of a French mortgage for foreign buyers?

  • A minimum loan of €100,000 is typically required for British or EU buyers (€150,000 for American or other non-EU residents). Most banks will not consider a mortgage loan lower than this amount for non-residents.
  • The maximum LTV is 85% (although 75-80% is more likely) for EU nationals, and this includes British buyers post-Brexit. For American, Australian, and other non-EU Nationals, the maximum LTV is 60%. 100% mortgages are only available to French tax residents.
  • This means that a British buyer would need a minimum deposit of 15-20%, while an American or Australian buyer would need to put down at least 40%.
  • Mortgage protection life insurance is typically required.
  • Loan durations are typically from 6 to 30 years.

French Mortgage Eligibility

The biggest factor in determining your eligibility for a French mortgage is your financial situation. Unlike many foreign mortgages, French lenders do not carry out credit checks on potential borrowers. They do, however, require extensive documentation to prove your financial situation and you will need to meet certain criteria.

French Mortgage Eligibility Criteria:

Age limits: Most lenders in France will only approve a mortgage until the eldest borrower is 75 years old. While it’s quite possible for over 60s to secure a French mortgage, there may additional terms attached. Older borrowers will likely be entitled to a shorter loan duration and additional insurance premiums would also be required.

Income: All borrowers in France must pass very strict debt-to-income ratios. France is unique in that there is a legal requirement that your financial liabilities—including any other mortgages, rental expenses, or other loans you have—must not total more than 33% of your net household income. Lenders also tend to favour foreign buyers who have some liquidity, in cash ISAs or savings, rather than having all their financial resources tied up in assets.

Employment status: French banks definitely favour those with a steady income and permanent employment. However, there are still options for self-employed candidates and business owners. If you’re self-employed, expect to be asked to provide a minimum of 3 years of activity, with a turnover that meets the income requirements.

Insurance requirements: Typically borrowers are required to take out a life insurance policy equal to 120% of the mortgage amount. Many lenders will also ask to see adequate property insurance, and may also require additional insurance for borrowers over the age of 60.

The property: French lenders also place a lot of emphasis on the property itself, most notably the probability (and potential speed) of a resale. Newer properties in popular or up-and-coming real estate areas make excellent candidates for a French mortgage. On the other hand, a remote rural property in a very poor state of repair would be considered a much higher risk for a lender. A property such as this combined with a non-resident buyer and a less-than-solid financial profile, could definitely lead to an application being rejected.

What if I don’t meet the criteria?

While certain criteria are non-negotiable (not meeting the minimum income, for example), if you are confident that you have sufficient funds for a French mortgage, but don’t meet other criteria (for example, you are self-employed or have assets split between different countries), there may be other options available. The best advice is to consult an international mortgage broker (more about that in a minute) who can look at your individual situation and advise on the potential mortgage options.

Types of French Mortgages

While re-mortgaging and releasing equity is possible in France, it is not as easy as in the UK and other countries, and can be costly. For most French buyers, a mortgage is a one-time deal. That’s why it is essential to choose the right type of French mortgage at the time of your property purchase.

It’s important that you fully understand the details of the loan agreement, too. Many French mortgages are favourable for foreign buyers, but some conditions may be different from what you are used to in your country of residence.

Interest-Only Mortgages

Interest-only mortgages are a popular and cost-effective option, especially for buy-to-let and investments properties. However, while this is an option in France, they are only approved in rare situations, especially for foreign buyers.

Full-term interest-only mortgages are even rarer. Where they are available, potential borrowers will invariably be asked to prove that they have other property and financial assets to the value of 120% or 150% of the loan amount.

Instead, most lenders are only willing to offer interest-only financing over an initial phase of the overall term, before the facility reverts to capital and interest repayment. To take a 20-year mortgage as an example, this could mean two years of interest-only followed by 18 years of repayment, or it could mean a more even split of 10 years each.

Read the article Are Interest-Only Mortgages Available in France?

Repayment Mortgages

The vast majority of French mortgages are traditional, fixed-term repayment loans. These generally benefit from lower rates and can be arranged over a term of anything from 6 years up to 30 years.

The market offers three types of repayment mortgages: variable rate, fixed-rate and capped rate.

Variable-Rate Mortgages

Variable-rate repayment mortgages are typically tied to one of the EURIBOR base rates – this is the ‘European Inter Bank Offered Rate’ and is the Eurozone’s equivalent to the LIBOR. The rate which applies to your variable mortgage will therefore depend on movements in the EURIBOR index.

It is important to note that a rate rise may not necessarily result in your monthly instalments increasing, as you may be used to with other foreign mortgages. It is more common in France that the monthly payments remain the same, but the overall term of your mortgage will be lengthened or shortened accordingly. In cases where interest rates drop, you may benefit by paying off your mortgage earlier than expected; in cases where interest rates rise, you may find yourself taking longer than hoped to pay off your mortgage.

One notable advantage of this kind of mortgage for foreign borrowers is that they tend not to penalise overpayments. Providing you are making a lump sum that is over 10% of the loan amount, most banks are happy to accept capital payments and allow you to end the mortgage before the agreed term. This can be tempting for foreign buyers and investors, allowing you to pay off your mortgage when exchange rates are most beneficial.

Fixed-Rate Mortgages

The most popular repayment mortgages on the French market have rates that are fixed for the duration of the term. Foreign borrowers may be pleasantly surprised to see how low these rates can be, given the level of financial security that they guarantee.

This kind of mortgage means minimum risk from a financial point of view, as you can be certain of your monthly outgoings and term length. Although interest rates are typically slightly higher than variable-rate mortgages, they are still often low compared with foreign mortgage rates.

However, some fixed-rate mortgages do impose penalties for overpayments or redeeming credit within the fixed-rate term. If you are likely to want to make one-off lump sum payments on your mortgage or pay off your mortgage before the end of the term, it’s important to understand if and when these penalties apply.

As in other countries, there are also fixed-rate mortgages available which secure the rate for a first term only (typically between 2 to 5 years), after which the mortgage becomes variable.

Capped-Rate Mortgages

The most recent introduction to the French non-resident mortgage market has been that of the capped rate. In essence, this facility works in the same way as a variable rate. The bank, however, will set an upper limit on the rate which applies during part or all of the mortgage term.

This option provides a certain level of security for those who are concerned about rising base rates, while at the same time generally allows for penalty-free overpayments. In these times of financial uncertainty, it has proved to be a very popular choice among non-resident buyers.

While these are by far the most common and available mortgages in France, there are some other options available, particularly if you choose to go through a mortgage broker.

Read our article French Mortgage Types: Fixed-rate, Variable, and more

French Mortgage Rates and Fees

As of September 2020, French mortgage interest rates are currently between 1.5% to 2.5%. These rates are determined by a number of factors, most notably:

  • The amount you are borrowing and the LTV rate. Borrowers putting down a sizable deposit are often seen as lower risk and may benefit from lower rates accordingly.
  • The mortgage type. The interest rate will depend on whether you take a fixed rate or a variable rate mortgage.
  • The mortgage duration. Shorter mortgage terms typically benefit from lower rates (although, of course, your monthly payments will be higher).
  • Your place of residence. French residents will typically benefit from lower rates than non-residents.
  • The property. Properties deemed higher risk may incur higher rates.
  • Your personal situation. Any factors that distinguish you as a higher risk for lenders are likely to mean higher rates.

Additional costs and fees

Most international buyers will take out a mortgage under a Conventional French Mortgage Charge. In this case, the legal process of registering your mortgage is undertaken by a notaire and fees are typically around 2% of the loan amount. An alternative option is a Priority Lien Charge, also undertaken by a notaire. This is a popular choice with French buyers as fees are lower (typically around 1%), but there are some limitations. It is only available on older properties (not new builds) and releasing equity is not possible.

Another increasingly popular option available from French banks is an institutional guarantee. In this case, the loan guaranteed by an institution run by a group of lending organisations, thereby splitting the risk between participating lenders. These types of mortgages are generally cheaper to set up, but they are only available to French residents.

Along with the cost of setting up your mortgage, there are often additional administration fees added to this by the lender (typically 0.5 – 1.0 % of the amount borrowed). If you choose to use a mortgage broker, there may be additional broker fees too.

Read our article French Mortgage Rates: How Much Does a Mortgage Cost in France? or estimate your borrowing capacity with our French Mortgage Calculator.

Choosing a French Mortgage Lender

If you are considering purchasing a French property using a French mortgage, there are two options. You can approach the French banks directly or you can use the services of an independent French mortgage broker.

Mortgages lenders include France’s national banks (Credit Lyonnais, BNP-Paribas, Société Générale and CIC) and mutual banks (Crédit Agricole, Crédit Mutual, Caisse d’Epargne, and Banque Populaire), as well as La Banque Postale. Each have different lending criteria and types of mortgage products available, but options can be limited for those whose circumstances differ from what French banks consider the norm – such as being self-employed or being tax resident in a non-European jurisdiction.

Outside of the main banks, there are also French property banks such as Entennial, l’UCB, and Crédit Foncier, and UK international banks such as Abbey National, Barclays, HSBC, Halifax, and Royal Bank of Scotland. These may provide more competitive rates and greater flexibility for overseas buyers.

Read our article Mortgage Lenders in France: Which Are Best For Foreign Buyers?

Using a Mortgage Broker in France

Employing the services of an independent French mortgage broker can be a smart choice for foreign property buyers, especially if your situation differs from the norm. Mortgage brokers provide you with access to the entire market and will be able to find the most suitable mortgage product for your individual circumstances. A broker may also provide you with access to discounted rates and products that are not available when approaching the lenders directly.

Another big advantage of using a mortgage broker is that they will be able to advise you on how best to approach your mortgage application, increasing the chances of your mortgage being approved.

Read our article Using a French Mortgage Broker.

Applying for a French Mortgage

Although you cannot request an official mortgage offer before signing the Compromis de Vente (the initial sales contract) on your French property, it is possible to obtain an agreement in principle (AIP) for your French mortgage in advance. Not only will this give you a good idea of how much you can borrow and some peace of mind that your mortgage will be approved, but it can also stand you in good stead for negotiating on your chosen property once you’ve found it.

Mortgage applications can be time-consuming, taking as long as 12-14 weeks from initial enquiry to the release of funds. It is worth investing the time up front to make sure your finances are packaged together in the most attractive and transparent way for the French bank analysts and underwriters. You will only get one shot at the application, so don’t leave anything to chance.

Expect to be asked to provide a number of documents including:

  • Your passport(s), marriage certificate (if applicable), and proof of residence
  • Proof of main and supplementary income (for self-employed borrowers or business owners, this includes audited finances from the last three years)
  • Bank statements from the previous three months, and tax returns
  • Copies of current mortgage or rental agreements
  • A state of assets form
  • The Compromis de Vente
  • Life Insurance certificate or application

Read our Applying for a French mortgage: Step by Step Guide

Ready to Apply for Your French Mortgage?

From finding the best mortgage rates to making your mortgage application—FrenchEntrée is here to guide you through the whole process. Learn all about French mortgages with our Essential Reading guides, keep up-to-date with the French mortgage market through our latest posts, then sign up to become a FrenchEntrée member for free access to our property, currency, and mortgage experts.

Once you’re ready to kick-start your French mortgage search, fill out our mortgage application form. Our independent mortgage advisors can advise you on the best options for you and put you in touch with mortgage brokers and lenders all around France.

Disclaimer: This guide is provided for general information purposes only and is not intended to be a substitute for professional advice regarding any aspect of purchasing a French property or French mortgage applications. If in doubt you should consult your mortgage broker, lender, or legal adviser. FrenchEntrée cannot be held responsible for the consequences of decisions or actions you may choose to take in connections with a property purchase or French mortgage.

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