Buying property: cash or mortgage?
How you finance your property purchase in France is an important decision. Simon Smallwood considers the implications of buying with a French mortgage or with cash
Interest rates in the eurozone (along with the US and UK) are at historic lows which means it has never been cheaper to borrow money, while the returns you receive if you hold money in a savings account have also never been lower!
This provides something of a dilemma for would-be French property buyers – should you finance your dream using a French mortgage or complete your purchase using cash savings? Here we look at some of the points to consider with both options.
Why take out a French mortgage?
1. Raising money against a property you already own in France is tricky…
As a general rule, French mortgage lenders are more cautious than lenders in the UK. One of the side effects of this is that it is much harder in France to raise money against a property you already own.
In the UK, US and other markets, raising equity against a property in this way is very common and the funds that you raise can be used for a variety of purposes. In France very few lenders allow you to raise equity against property you already own and there are only a few reasons, such as financing building work or using the funds to purchase another property, that are considered as acceptable for doing so.
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The most cost-effective and straightforward time to secure a mortgage against a property in France is when the purchase is being completed. It makes sense, therefore, to think carefully about whether you are likely to want to raise finance against the property either now or in the future.
Furthermore, remortgaging (changing your mortgage from one lender to another to obtain a lower rate) in France is also far less common and more expensive than in the UK and US, so it is important that you choose the right French mortgage product for the long term from the outset.
2. Exchange rates – French property may become even cheaper
It is widely anticipated that as the UK and US economies improve and interest rates in these regions start to rise, their currencies (sterling and dollar) will strengthen against the euro. This in turn would have the impact of reducing the sterling cost of a second home in France.
Purchasing a French property now using cash savings could therefore increase the sterling cost you pay for the purchase if the sterling vs euro exchange rate strengthens in the future.
Taking out a flexible French mortgage (in euros) to finance your purchase, with a view to paying it off if and when exchange rates move in your favour, is a popular option.
Of course, no one has a crystal ball with which to predict the future direction of exchange rates. If you are more cautious you could simply finance 50% of the purchase price using a euro mortgage and 50% using sterling cash savings. This would provide you with a natural hedge against future exchange rate moves.
3. Borrow at historically low interest rates
French mortgage rates are at historic lows (variable rates from 2.30%) and are much cheaper than the typical range of 5-8% that has been seen over the past 20 years.
It is entirely feasible that as inflation rises in the medium term and interest rates in the eurozone rise, anyone who has taken out a fixed-rate French mortgage at current levels will be feeling happy with their decision in a few years’ time.
4. Help your tax and financial planning
When calculating your wealth tax liability in France the French tax authorities will look at the net value of your assets there. Where property ownership is concerned, this net price is considered as the property’s value less any mortgage/debt you have secured against it.
Therefore, having a French mortgage secured against your French property can reduce the wealth tax you pay. You may also be able to offset any rental income the property generates against the interest you are paying on your French mortgage.
5. Ensure you are paying a fair price for your property in France
When you take out a French mortgage the lender will normally carry out a valuation to satisfy themselves that the property provides sufficient security for the loan. Although the bank will not divulge the result of the valuation to you directly, the lender will only lend you the money at a certain LTV (loan to value ratio) if they are happy that the property is fairly valued. This provides you with the peace of mind that you are paying a fair price.
Simon Smallwood is business development director with International Private Finance
Tel: 020 7484 4600