Simon Smallwood explores different mortgage options that can help you to manage the potential increase in French lending rates…
Over recent months, potential buyers of French property have been greeted by historically low French mortgage rates. The three-month Euribor, the base rate used by many French lenders, has been at -0.30%, meaning that borrowing in France is more economical than it’s ever been before. However, with rates at historic lows, the only option is for them to rise…
Waves of Uncertainty
The election of Donald Trump has sent waves of uncertainty across the Atlantic, which has caused an increase in borrowing costs among Europe’s governments. The ten-year government borrowing costs in France were around 0.10% prior to the US election. Since the results, they’ve increased to 0.79%.
That’s going to have a knock-on effect upon French mortgage rates, which are predicted to increase over the coming weeks and months. However, there are a number of ways to protect yourself against French mortgage rates rising in the future.
In France, it’s very common to take a long-term fixed rate. Unlike in the UK, where borrowers tend to re-mortgage their product every few years, in France you can take out a fixed-rate mortgage for up to 25 years. That gives you complete protection against any potential rate increases for the lifetime of the loan. The slight downside to fixed rates is that they tend to come paired with early redemption penalties, which are typically six months’ of interest on the amount redeemed.
If you’re planning to overpay your French mortgage before the end of the term and want to avoid any fees, a capped variable rate could be a good alternative. These products are fully variable and track the Euribor but come with added protection in the form of a cap, normally 1-1.50% above the starting rate. This means that once your rate hits a certain level, if the base rate continues to rise, your rate will remain at the nominated cap. The cap usually has an expiry date of around 7-10 years, so after this period you’d be on a fully variable product.
Some variable mortgages in France, such as the capped products already discussed, differ from those in the UK. In France, when the mortgage rates rise, it’s initially the term of the load that increases rather than the monthly repayment. The French mortgage term would be lengthened by a maximum of five years, at which point the lender would then begin increasing your monthly payment. This means that, for a period of time, you’re protected from payment increases, no matter what happens to your mortgage rate.
If you’re currently on a high-interest French mortgage product, there could be the option of taking advantage of the current low rates by re-mortgaging onto a more competitive product. That can be quite costly in France but is more than worthwhile looking into.
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French Mortgages: Frequently Asked Questions>>>
Originally published in issue 119 of FrenchEntrée Magazine