French Mortgages

How has the credit crunch impacted on the French mortgage market and the loans available? Jo Cowling reports...

As the saying goes, a year is a long time in politics’. Politics aside, an awful lot has happened in the last year, whoever you are, and in particular in the financial markets and the financial services industry.We wrote a piece last year entitled The credit crunch one year on’ (October 08) and hoped that this update wouldn’t be necessary. However, with times still uncertain we thought this might be a good opportunity to discuss what has happened during the second year of gloom and bad news, and hopefully provide some optimism.Since we last reviewed the market, Lehman Brothers has gone bust, and the Royal Bank of Scotland, Lloyds TSB and HBOS have all been part-nationalised. A number of the UK’s building societies have also had to be bailed out by the government. Many well known high street chains have gone into administration and there have been a huge number of job losses across the UK.As I’m sure you’ve heard, it is not only the UK that is suffering and a number of other financial institutions across Europe and the rest of the world have also got themselves into financial difficulty.In balance to all the pessimistic news, there has been a fair amount of talk over the summer that green shoots’ are appearing and that the credit crunch may not turn out as badly as once feared.While we’re not going to try and call the bottom of the market or predict too accurately what is going to happen in the future, we will look at how the French mortgage market has been affected over the last year and the outlook for the year ahead.French lendersWe’ve highlighted a number of times over the course of the last year that, as a general rule, the French mortgage market has been less affected by the financial turmoil than the mortgage market in the UK. French lenders have always been more cautious than their counterparts in the UK and US so it is no surprise that they are in a better position to maintain their lending, with criteria remaining relatively unchanged.Whereas over the past 10-15 years most UK-based purchasers of French property have financed their transactions using money raised on their property in the UK, the credit crunch has ensured that this is far more complicated than it once was, and is no longer an option open to everyone.The cost of raising finance in the UK has increased while lenders have become much more risk averse. This is most commonly highlighted by the reduction in LTVs (loan to value) currently available, and by the fact that a lender will now often place restrictions on what funds can be used for. If a client wishes to purchase a property abroad, some lenders will now require proof of this, and some will simply no longer allow this.The costs of UK financing options have increased so that they are now much more in line with raising finance in France. As a result of this, the level of interest in looking at this option has also increased.Rising costsHowever, it was impossible to believe that French lenders would not be affected at all, as the cost of lending has increased worldwide. Shortly after the collapse of Lehman Brothers in the autumn of 2008, the significant increase in the cost of raising money on the interbank money markets ensured that margins (the interest rate you pay over the Euribor index that the mortgage tracks) charged by French lenders on their mortgage products started to increase. As a general rule, margins increased from around 1% to as high as 2.75% with some lenders.During the early months of 2009, we also saw some French lenders starting to change terms available to non-resident clients, withdrawing products and changing criteria for others.The products that generally saw the greatest changes were those that were closely tailored to the non-resident market and often weren’t available on the French domestic mortgage market itself. A good example of this is the availability of equity release for self-employed people and the availability of interestonly mortgages.The products that have been least affected are those that the lenders see as lowest risk – i.e. low loan-to-value repayment mortgages for the purchase of a new property.However, despite this, the French mortgage market has fared much better than its UK counterpart. While some French banks have made negative changes, there have been new entrants into the market, who have come in offering very attractive products that were not available previously. A good example of this is the widespread launch of 100% LTV mortgages and options for clients who were able to place assets with the lender.Larger loansAnother area that has been impacted is the market for larger loans in France. During the boom years, many private banks and offshore lenders offered credit-only deals (mortgages without requiring the client to develop a private banking relationship with the institution) on the understanding that this would provide a platform from which to develop a more rounded financial relationship in the future.The credit crunch has seen a sharp withdrawal of lenders from this market, as they are now looking for clients who need more than just a French mortgage and want to make significant investments upfront.Green shootsHowever, green shoots are indeed starting to show. In the past couple of months, margins and interest rates have started to come back down. As everyone is aware through the publicity it has received in the press, European and British interest rates are at historic lows. This means that starting rates and margins currently available for French mortgages are starting to look much more competitive with many around 3% and 1.75% respectively.With the expectation in the markets that the major economies of the world may have reached a trough, and with financial markets starting to recover, it is hoped that mortgage rates may get a touch cheaper from here on.The big question on everyone’s lips is when will interest rates bottom, and what is the outlook going forward, particularly for fixed rates.The turbulence in both the foreign exchange and the interest rate markets has also highlighted the benefit of being able to reduce the financial risks associated with purchasing a property overseas that is valued in a different currency.It is becoming more widely acknowledged that, from a financial planning point of view, it can be very sensible to have at least a small amount of euro debt secured against a euro property asset (when the alternative may be financing it though debt raised in sterling or through using other sterling denominated assets) as it provides you with a natural hedge against future movements in exchange rates. For higher end purchases, it can also limit or decrease your liability to pay wealth tax on the property.What is more, there can be additional income tax benefits to having debt secured on the French property, as the French mortgage can offset both the net value of the property and any rental income that you may receive.While it is difficult to comprehensively predict what is going to happen over the next 12 months, the past year has highlighted that it has been more important to take good impartial advice when considering the options of how best to finance your French property purchase. Lenders’ criteria, rates and products are changing faster than ever before, and with the ever larger number of lenders in the market, a good French mortgage broker is by far the most efficient way of keeping up to date with the most suitable and cost effect mortgage products available.Story by,Jo Cowling is a French mortgage advisor at International Private Finance