Competition amongst buyers is increasing for properties in prime locations or those that are deemed to be very favorably priced by vendors. As a result, cautious buyers are increasingly starting to lose out on potential properties as the traditionally busier late summer and autumn buying season gets under way, despite the challenging economic conditions.
With this in mind, we are going to look into the financing options available should you decide to complete your French property purchase in cash initially, with the intention of raising a French mortgage to replenish some of the money shortly afterwards.
Post Finance Mortgage
In France, the majority of lenders provide the option of a ‘post-finance’ mortgage. This allows you to take out a French mortgage, secured against your new property, for a period of between six and 12 months after you have completed the purchase of your new French home.
These products also allow you to benefit from the lower interest rates and costs associated with purchase mortgages in France. Where they are available, lenders tend to charge higher interest rates and margins for equity release mortgages – where you are raising funds against a property that is already owned.
In some instances, it is also possible to raise money through a post-finance mortgage to replenish funds you have used to carry out renovation or new building work on your home in France. Again, this is available as long as the mortgage is applied for, and in some cases completed within a set time frame (six to 12 months, depending on the lender) of the work being completed.
Another important factor to take into account is that French banks and those in many other countries are becoming increasingly cautious about raising equity against properties you may own. These restrictions, along with the higher potential costs associated with capital raising and equity release mortgages highlight the importance of thinking ahead with regards to your financial plans.
French mortgage lenders are infinitely more comfortable lending money against a French property at the point at which the property is being purchased. With interest rates close to historic lows, the cost of taking out and maintaining a French mortgage is extremely competitive at present. Increasingly savvy buyers, who have the cash resources to purchase their property outright, are considering the benefits of having at least a little mortgage debt secured against their new French property.
Even if the time frames required to complete the purchase mean you choose to initially fund the transaction using your cash resources, there are a number of reasons why you may consider replenishing these funds using a post-finance French mortgage. These include;
Peace of Mind and Flexibility
Does it make sense to have a significant proportion of your liquid wealth (cash) tied up in a French property, thereby limiting your access to these funds? With opinion divided as to the current economic outlook, many people like the peace of mind and flexibility provided by having some cash savings in reserve. Purchasing your second home in France using even a small French mortgage may give you this option and can be paid off when the outlook improves.
Reduce the Sterling Cost of Completing Your French Property Purchase
With the sterling/euro exchange rate currently low, many wealthy buyers are looking to take advantage of low French mortgage rates and borrow in euros. Taking out a flexible French mortgage to finance at least part of the purchase reduces the sterling funds that need to be transferred to France at the current, low exchange rate. With expectations that sterling will strengthen against the euro in the medium term, these buyers can simply pay off their French mortgage with their sterling savings once the exchange rate has moved back in their favour, thereby reducing the sterling cost of purchasing their second home in France.
Reduce Your Potential Tax Liability
French second homes also contribute towards assets on which wealth tax in France can be paid. If you own significant (above around € 1.3 million) net assets (the value of the assets less any debt secured against them) in France, you may be liable to pay an annual wealth tax. Having mortgage debt secured against your property in France can help mitigate this wealth tax liability although it is important that you always seek professional advice regarding this.
• Should you plan to rent your French property out, it may also be possible to offset some of the rental income against any mortgage interest you pay for tax purposes.
Savings held in a bank account or in liquid investments are unlikely to generate a significant financial return in the current climate and with it becoming increasingly expensive and difficult to raise money (release equity) against an existing property (in the UK, France and elsewhere) it is important you consider the options available.
With this in mind, French property buyers should give some serious thought to whether or not it makes more financial sense to have a little debt secured against your French property or to complete your second home purchase using funds you already have available.
For more information about getting a French mortgage, or to receive a quote, contact one of our mortgage advisers today.