Mortgage Update: “When is a Mortgage not a Mortgage?”

Answer: When it becomes a business loan.

If you’re a prospective French property buyer, you need to be aware that if you plan on buying a property to run as a business – if the primary goal of buying that particular property is to generate income – you may not be able to obtain a residential mortgage.

Lenders will want to understand not only the income, debt and financial profile of the prospective borrower(s) but also your motivation for purchase. Is it to be a holiday home or résidence secondaire? Or is it – like 74% of the attendees of our recent FrenchEntrée webinar – to emigate and permanently relocate to la belle France?

Spoiler Alert: Generating an income from property in France is not a new concept; you aren’t the first to come up with the idea! Foreign buyers have settled in France since the 1960s running gîtes and chambre d’hôtes (Bed and Breakfast). More recently, in a crowded market, property owners wanting to generate an income have had to be a bit more imaginative, diversifing into events, weddings, health and wellbeing courses, sustainability projects and cooking classes!

Holiday Homes

If you are buying a holiday home in France which you will use for some of the year, and you plan on letting it out on AirBnB or similar when it is empty to cover some of the running costs, that should be fine for a residential mortgage. Your primary motivator is to buy a gorgeous holiday cottage in a Bastide village or an apartment in Antibes, not to purchase a vehicle for generating rental income.

If, however, you want to invest in a property in France which will be rented out for most of the year, or it is already rented out and generates an income, then you’d be looking at a Buy-to-Let product with different terms, conditions and rates.

Permanent Homes

You’ve made the decision to permanently emigrate to France as a couple or a family. Excellent decision!

• Scenario 1:

You’re in the fortunate position that you have a job or profession which will allow you to continue working remotely from France. Great. In that case whatever you decide to buy needs to have enough space for you, your family and probably some friends or extended family to come out and stay. You might buy a property with a couple of extra bedrooms in the main house, and maybe the property also handily comes with a gîte or maison d’amis. It has a garden or some land, and maybe some outbuildings (which you may or may not do something with in the future). You may even decide to rent out the gite in peak season to make a bit of money – the income you make can cover your utilities and taxes for the year. There’s no reason why – subject to income and financial profile – you shouldn’t be able to apply for a residential mortgage.

What you’re looking to buy is typical of many foreign buyers – it’s a classic brief.

However…

• Scenario 2

Let’s imagine that you are a couple looking for a complete lifestyle change. You want to move to France and enjoy the good life, but you can’t do your jobs from France (or wouldn’t want to!). You won’t have any/much income once you move to France, so you’re going to have to sweat the asset; the property will need to generate as much income as possible. You’re therefore looking to buy something which can accommodate a large number of (paying) guests, and might have other sources of income like a restaurant or a campsite.

So you might want to acquire a property with 8 bedrooms plus 2 gites and loads of land, or a chateau with a restaurant and hotel rooms. In that case you’re going to have a hard job convincing a lender it isn’t a commercial property requiring a business loan rather than residential mortgage financing. “You say it is just for you…so why do you need 14 bedrooms?!”

Remember that French banks have a very conservative lending policy; above all they want to be satisfied that you will be able to repay the loan for the duration. Just because you think you can run a château and generate an income doesn’t make it so. If you were a successful dentist in Slough, it doesn’t necessarily follow you will be a credible hotelier or restaurateur in the Dordogne! If what you intend to buy requires a business loan rather than a residential mortgage, you will be required to provide a business plan evidencing how you will either (a) maintain the existing profit generated by the business or (b) generate income from scratch. This will involve looking at your background, experience and qualifications – so if your background is completely irrelevant you may struggle to get a loan.

Simon Conn, Overseas Mortgage Specialist:

“There are no black and white criteria for whether an applicant will require a residential or commercial mortgage.

If an applicant is buying a large house or château with the intention of having a ‘lifestyle change’ and seeks to run the property commercially, then generally speaking it is not financeable in the usual way.

If, however, an applicant is buying the same to use as a second residence and has the resources to pay for it in cash, but would prefer to borrow in France and has the means to comfortably cover the running costs and any refurb from their own resources then these cases can be financed.

It really is on a case by case basis depending on the property and the overall client profile.”

Please get in touch – [email protected] – if you’d like to explore eligibility for a French mortgage or understand more about the process.