The process of borrowing money to fund a property purchase is broadly similar on both sides of the Channel, but there are certain differences between French and UK mortgages which buyers need to bear in mind.
The first thing that a British buyer in France needs to fundamentally understand is that UK banks are unable to arrange a mortgage which is directly secured against a French property. In fact, only French lending institutions are authorised to take a guarantee on French real estate. This means that buyers have to arrange the financing through French lenders. In order to do so, certain lending criteria need to be met, just like here in the UK. However, these lending criteria may not be so familiar to UK buyers. Rather than calculating income multiples, the lender’s calculation typically works on the principle that the monthly French mortgage payment – in addition to any existing mortgage, rent or consumer credit outgoings – should not exceed one third of the buyer’s gross monthly income.
As an example, if a buyer’s UK mortgage was £500 per month and the proposed French borrowing would require a payment of £300 per month, the total outgoings would equate to £800 per month. In these circumstances, the buyer’s gross pay would need to be at least £2,400 per month – three times the outgoings – for the bank to consider the loan. Provided that this basic affordability criterion is met, the underwriters will proceed to study the case further. This includes ensuring that the borrowers have a minimum amount of money left over on a monthly basis, and that overall savings levels are sufficient to easily afford the capital outlay on the purchase.
In order to prove that the criteria above are met, borrowers are required to submit a full file of financial documentation in addition to completing the bank’s particular application forms. UK borrowers beware: if raising finance seems paperwork-heavy over here, the French take this sort of bureaucracy to another level! At least lenders now allow the vast majority of documents to be sent across to them in electronic form, which can save valuable time.
The types of mortgages available from French lenders are similar to those offered by UK banks. Facilities are offered on either a Capital Repayment or Interest Only basis, and rates can be fixed, variable or capped. The interest rate payable for each mortgage is usually driven by the ‘Loan to Value’ (LTV) ratio. In general, the greater the deposit a buyer is able to put down on a purchase, the more competitive the mortgage deals available to them. When deciding between which type of rate is most suitable, a key consideration surrounds whether the buyer expects to keep the mortgage for the full duration of the term. If so, a fixed rate can be very appealing in France. Yet if the buyer wants to pay the mortgage off early, a variable rate may be required in order to avoid financial penalties for premature redemption.
Main Factors to Consider:
This introduction has hopefully given a flavour as to what to expect when arranging a mortgage in France. Overall, it is a perfectly feasible option. Yet the alternative may be for buyers to raise equity against their UK residence, in order to transfer the funds across into euros and buy the property outright. This may seem a safer option for cautious British buyers who are daunted by the prospect of dealing with French banks. But the French mortgage should not be discounted, as it brings certain advantages. Here are five of the most relevant in today’s financial climate:
- Taking a mortgage in euros means that this large portion of the purchase is not immediately exposed to the exchange rate. Instead, the buyer’s sterling funds are gradually transferred into euros over the course of the repayment of the mortgage. Therefore, the borrower can chose the moment to make these transfers when the rate moves favourably, potentially saving thousands of pounds.
- Fixed rates are particularly attractive in France. As of August 2013, a mortgage could be fixed with a French lender at 3.25% for a full 20 years. This could be a reassuring sight indeed for risk-averse borrowers!
- There is a danger involved in taking a mortgage out in a different currency to that in which the property is valued. If the pound dramatically strengthens, the UK debt could end up being worth more than the euro-valued property in France. This effectively creates negative equity for the property.
- There are various tax implications involved in taking out a French mortgage. It could help to protect you from French wealth tax, or even offset income tax if you choose to let the property out. Buyers should always seek professional advice from a French legal expert on these matters.
- It is always easiest to raise money against a French property at the time of the purchase. Please be aware that, should you wish to release some capital from the property a few years down the line, this often proves to be a much more complex and expensive process than doing so at the point of purchase.Of course, whether you choose to take a mortgage out in the UK or France will all depend on your personal circumstances. The best course of action is always to speak with a French mortgage broker who will be able to assess your situation and advise on the financing available accordingly. Having an English-speaking point of contact between you and the French bank can make all the difference in terms of ensuring your peace of mind throughout the process.
Please click on the following link if you’d like more information on how to Apply for a French Mortgage