Purchasing a property on the other side of the world is, without question, a substantial undertaking. There are many factors which need to be overcome in order to make your purchase a reality. However, most people would not want to proceed with the transaction on any level until they are sure of its financial viability.
For those of you who have saved enough to fund a deposit in France, and for others who wish to consider the financial planning of their purchase from every perspective, we are going to explore the option of taking out a French mortgage.
As you can imagine, not every French bank is able to provide financing for people whose income is derived outside of Europe. However, many lenders do have departments dedicated to non-resident borrowers, who are happy to underwrite mortgage applications from Australian residents. Despite recent economic turbulence in Europe, the majority of these banks have retained their non-resident mortgage activity and there is a healthy appetite in France to lend to foreign property buyers who meet their criteria.
From a practical point of view, this does mean that you will need to provide full disclosure of your existing finances, which should all be backed up by relevant formal documentation and statements. To help smooth out the process, most banks will accept electronic copies of your paperwork. With regards to the criteria, a good French mortgage broker will be able to explain to you how affordability calculations work. You should expect to pay a deposit of at least 20% of the purchase price, in addition to the obligatory notaire’s fees.
So what are the benefits to be had from financing your purchase with a French mortgage?
In the first place, right now you would be able to take advantage of the very attractive interest rates available in Europe. French mortgages are invariably linked to the Euribor (Euro Interbank Offered Rate), which has dropped to a historically low level in the aftermath of the global credit crunch. The French mortgage market has therefore benefited from appealingly-priced facilities, which are available not just domestically but also to overseas investors borrowing in euros.
For example, a variable or floating mortgage may offer a starting rate as low as 3%. Alternatively, the classic French mortgage has a rate which is fixed for the duration of the term. You may find that you are able to fix a rate at under 5% for the duration of a 20 or 25 year term. These rates tend to compare very favourably with domestic Australian mortgages, and often prove a cheaper alternative for those who are planning on drawing more funds from an existing line of credit.
This low cost of borrowing should always be a consideration, even if you are in a position to buy in cash. Financially, it may make most sense to protect a portion of your dollar savings by taking the finance out in euros. This would put you in the position of servicing a small amount of interest in France, while the dollars you shielded are earning a higher level of interest in an Australian investment or savings account.
The benefit outlined above will be further accentuated if you choose to let your new French property out to holidaymakers or long-term tenants. The majority of you will not be planning to reside in your new home the whole year round and may intend to draw some level of rental income from it where possible. In doing so, you would be able to service the mortgage repayments by using a direct source of euro funds. This means that you would not be exposed to foreign exchange transaction charges and rate fluctuations on a monthly basis as you pay the French mortgage down.
There is also a tax benefit to be gained from structuring your finances in this way. You will be charged income tax on the rental income that you earn in France. By taking out a French mortgage, you could also make use of potential tax benefits that can allow you to offset rental income against mortgage interest. As with all matters relating to tax it is always worthwhile taking professional advice.
A further fiscal consideration is that of the French wealth tax system. You would currently receive an annual tax invoice on net assets worth over €1.3 million in France, which includes real estate holdings. The key here is to remember that this charge only applies to the net value of the asset. Taking out a mortgage secured directly against the French property serves to reduce that net worth. On a potentially taxable property worth €2 million, for example, securing a mortgage of over €700,000 on the purchase would take the net value below the threshold. The owner would not be charged for wealth tax as a result.
We hope that this article has served to highlight some of the specific factors involved in taking out a French mortgage. Generally speaking, if you require a mortgage to fund your French purchase, it makes sense to hedge your foreign exchange exposure by securing a euro-denominated mortgage which shares the currency in which the property is valued. But no two purchases are ever the same and it can obviously be quite daunting to set about arranging a credit facility with a French bank. It is therefore always advisable to initially consult a reputable French mortgage broker.
The French mortgage broker should be able to provide an English-speaking service, as well as having knowledgeable staff at its disposal. This will help to allay any fears you may have at the onset of the process, in addition to giving you an informed idea as to the level of financing which may be available in your own circumstances. If you subsequently apply for the mortgage through a broker, you should expect to receive a fast-track service from the lender and often exclusively reduced rates, all of which may help to take some of the uncertainty out of what may seem at first to be quite an ordeal.