The economic challenges of the past few years have created uncertainty in the European financial sector. As a consequence it has become increasingly difficult to predict future patterns in Eurozone interest rate movements.
The good news is that the French mortgage market is well equipped to protect borrowers against future interest rate fluctuations.
Peace of Mind
Competitive fixed rate mortgages in France are widely available and historically French lenders have been very comfortable offering this type of product. In terms of the credit risk associated with borrowers defaulting, having the monthly repayment fixed for the life of the mortgage provides significant peace of mind for the bank and for you too.
Taking a fixed rate mortgage provides you with protection against rising rates. On the French domestic market, a very popular option is to fix your rate for the duration of the mortgage. The interest on your mortgage is calculated over the whole term, meaning that the lender will give you a monthly repayment figure that remains constant throughout. The shorter your term, the more favourable the rate is on offer.
Such products have proved particularly appealing to savvy investors who have been able to secure low and attractive rates at just over 4% for up to 20 years. They have then invested capital elsewhere and in the process generated a much higher return over the same period.
Although providing you with total security in terms of budgeting and keeping a grasp on your outgoings, fixed-rate facilities are nonetheless quite restrictive as they tend to penalise borrowers who wish to make early one-off lump sum payments or pay off the loan before the end of the term. As a general rule, making overpayments or redeeming the credit during the fixed-rate period will incur penalties from the lender. However, as competition in this area of the market has increased, it has become possible to obtain full-term fixed rates that only have redemption penalties for the first 5 years of the mortgage.
Many of us are perhaps more accustomed to fixed rate mortgages which only secure the rate for the initial few years. These products are also available in France. Lenders propose a rate for the first two, five or ten years, with the mortgage subsequently becoming variable and tracking the base rate. However, you must be aware that in France it is not as straightforward as in the UK to renegotiate your facility after the fixed period. The scope for any sort of refinancing tends to be limited and costly.
Capped Rate Mortgage
A more recent and popular addition to the French market is the capped rate mortgage. Following a relatively short initial fixed period, the borrower subsequently benefits from a rate ‘cap’ during the variable phase of the term. In other words, the rate is allowed to move but it cannot exceed a point set a percentage or two above the initial rate. Naturally, for a lower cap you will pay a higher initial rate. These products tend to allow for much more flexible overpayments, so have proved a worthy addition alongside the traditional fixed rate mortgages.
Talking to a good, reputable French mortgage broker will ensure that you have access to the most competitive fixed and capped rate products on the market. Going down this route will also ensure that you are given plenty of notice about any planned rate increases through a number of lenders. Your broker should also be able to keep you informed about the latest market trends, given that they deal with the lenders on a daily basis.
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