French mortgages: Hedge your bets
By taking out a French mortgage, you could protect yourself from currency loss, explains Jo Cowling...
In these uncertain times there are many good opportunities presenting themselves in the French property market. However, with uncertainty currently the dominant force in the financial markets, preparation is crucial.
When buying a property in France, one of the British buyer’s major concerns is that the asset will be valued in a different currency to their income. If you purchase a French property using sterling-based assets then the sterling cost will be dependent on the exchange rate at the time you complete the transaction. If you take out a French mortgage, the sterling cost of your monthly mortgage payments will also change. However, the exchange rate fluctuation for monthly repayments on a French mortgage will be significantly less than that realised on the full purchase price.
The benefit of using a French mortgage to fund at least a proportion of the purchase cost of your property is that the debt you are using, in most cases, will be in the same currency as the value of the asset you are buying and will therefore provide you with a natural currency hedge (protection).
During 2007, according to one major French lender, only 30% of French property bought by nonresidents was purchased with a French mortgage. Over the past 10 years, the most common way to finance a purchase has been to raise money against a property in the UK and then use that cash to purchase the French property outright.With the mortgage market in the UK under pressure, using this option to raise the funds for your French purchase, is becoming less widely available.
However the recent movements in the sterling/euro exchange rate have highlighted that the sterling cost of completing the transaction can vary significantly in-line with the changing exchange rate. With the exchange rate at the time of writing at around €1.10 to the pound, the sterling cost of purchasing a €250,000 French property is around �60,000 more today than if you had purchased it in February 2007, when the exchange rate was around €1.51 to the pound.
For astute buyers who are committed to making a purchase but had originally planned to use sterling-based assets to complete the transaction, taking out a flexible French mortgage, which can be redeemed at a later date, with no penalty once the exchange rate recovers is a popular option.
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During a recent survey of 20 of Europe’s most active mortgage banks, 79% of the lenders who provided a prediction expected the €/� exchange rate to be at €1.20 or higher by the end of 2009.
A second point you should consider is that, while arranging a French mortgage on your property, the lender will require certain checks to ensure the property is fairly valued and that there are no outstanding ownership or mortgage titles secured against the property. This should provide you with additional peace of mind.
Planning makes perfect
If you are going to use a French mortgage to finance your property purchase, then you can remove some of the stress involved by applying for preapproval. A good French mortgage broker will be able to guide you through the process. The French lender will then confirm whether, given your financial circumstances, it is prepared to lend you a certain amount of money, subject to a valuation of the property.
Not only does this give you peace of mind but it will also put you in a stronger position with potential vendors. Over the years, some estate agents and vendors in France have been put off by buyers who are looking to complete the transaction with a mortgage because of the extra time they believe it will take to secure approval.
Pre-approval ensures you have completed the majority of the paperwork before you begin to search for the property.When you find a property you like, you will also be able to confirm to the vendor that your finance is in place and you are in a position to move quickly. Essentially, you are then in a comparable position to a cash buyer, strengthening your hand when negotiating on the price!
Depending on the lender, financial pre-approval will normally be valid for around three months, however, it is straightforward to renew with more recent paperwork.
Starting the mortgage process early has another advantage: providing you with an idea of exactly how much you would be able to borrow. Mortgage lenders in France have been less badly hit than their counterparts in the UK, primarily because of France’s tighter lending policies.
French mortgages work differently to those in the UK because affordability is calculated using debt thresholds rather than earnings multiples. A French lender will tolerate a maximum of 30% of an individual’s gross income to be taken up by regular debt commitments (including a French mortgage, UK mortgage and any other loans you may have). A good French mortgage broker will be able to look at your financial situation and provide you with an outline of the maximum you would be able to borrow through a French bank. As each bank has different criteria, it will also save you from having to approach each lender individually!
One other question that you may be asking yourself is whether you should be opting for a fixed- or variable-rate mortgage. French mortgages usually track the Euribor base rate and, if variable, the interest rate will be revised at three-, 12- or 24-month intervals.When the interest rate is revised, the term of the mortgage either increases or decreases, rather than your monthly repayments. Fullterm fixed-rate options are also available.
With interest rates across Europe at an all-time low, the shortest-term, variable-rate mortgages will allow you to benefit from falling interest rates.When taking out a variable-rate mortgage, some French lenders will give you the option to switch to their fixedrate product, free of charge, anytime after the initial variable-rate period has expired (normally three months). In the current climate, this gives you the option to benefit from interest rate falls in the short term and then to fix your interest rate at or near the bottom of the interest rate cycle, reducing your mortgage costs over the longer term.
In the current climate, good financial planning can give you a real advantage when looking to purchase that French property of your dreams and will provide you with that all important peace of mind.