Jo Cowling has some useful advice to give you the best chance of obtaining a French mortgage to finance your dream home in France
The year 2011 proved a particularly difficult 12 months for the European economy. Financial markets across the eurozone spent long periods under the shadow of uncertainty caused by economic and political unrest in various member states. Such financial insecurity has inevitably affected the day-to-day workings of Europe’s most prominent banks.
With this in mind, we are going to look at how French lenders have reacted to these recent developments, with a view to giving you the best possible chance of securing a mortgage on your dream purchase in France during the coming year.
First and foremost, let’s start with the good news. A traditionally cautious attitude to debt meant that French mortgage lenders did not have their fingers too badly burnt by the global credit crunch, compared with their counterparts in the UK or USA. All of which means that the main French banks still generally have a strong appetite for mortgage lending, on both the domestic and non-resident markets.
This doesn’t mean, however, that mortgages are freely handed out to anyone who cares to apply. So which factors should you bear in mind if you intend to finance your holiday home purchase with a French mortgage?
Firstly, let’s go over the traditional criteria that need to be met in order to qualify for a residential mortgage in France. For their primary affordability check, lenders do not tend to employ an income multiple system as in the UK. Whereas UK banks tend to allow a mortgage of between three and five times the applicant’s salary, French banks concentrate on a debt-to-income ratio. By this system, they will typically allow between 30 and 40% of a borrower’s monthly income to be taken up with existing mortgage repayments and debt commitments, in addition to the new French mortgage.
As far as a deposit is concerned, banks will commonly demand a 20% down-payment on a residential purchase. A higher loan-to-value ratio of 90% could be available, but only if other specific financial criteria are met.
Following recent guidelines drawn up by financial advisory bodies, most French lenders now also carry out checks on the applicant’s so-called ‘passive ratio’. In a similar way to the income multiple system, underwriters now ensure that the total of all of your debt will not exceed the equivalent of five times your annual income. This requirement has proved particularly restrictive for buyers who already hold a buy-to-let portfolio. Rental income is generally not considered in full, which means that potential borrowers can find their applications rejected on account of the mortgages they have secured against other properties.
Beyond these broad checks, banks in France are becoming increasingly thorough in checking other factors in order to gauge the financial strength of each application. As such, you will be expected to provide full disclosure of your personal finances. This process will involve you sending over paperwork comprising identity documents, proof of main residence, bank statements, income confirmation and credit statements.
In relation to these documents, the underwriters are paying more and more attention to the state of the last three months of an applicant’s bank statements. All income and outgoings will be studied so be prepared to provide explanations for your financial transactions.
Over the limit
One factor which is increasingly becoming a sticking point for UK applicants is the use of an overdraft. While it is commonplace in the UK to spend a lot of time overdrawn, this is simply not the case in France. Overdraft facilities are not provided as standard for French bank accounts, and using an overdraft is viewed negatively and as a sign of poor financial management.
If you are thinking of proceeding with a purchase later in 2012, now is the time to act. You should aim to come out of your overdraft, and put together at least three months of ‘clean’ statements for your eventual application.
Another part of an application which is being more closely scrutinised by underwriters is the age of the borrowers. French lenders typically allow the term of a mortgage to run until the borrower’s 75th or even 80th birthday. However, they are now more cautious of candidates who are approaching retirement.
If you are employed and over 55 years of age, you can expect only a certain portion of your salary – around 65% – to be considered in support of the application. If this may affect your chances of securing the mortgage, it is advisable to put together documentation that proves the structure of your post-retirement income. If you are able to show evidence of a significant pension scheme, the lender may reconsider the amount of personal income to be taken into account.
Finally, don’t forget that the financial approval of your application doesn’t automatically mean that the mortgage is secured. The lender will typically carry out a property valuation, the cost for which is included in their arrangement fees, in order to verify the asset’s worth. If the valuers do not believe that the property is worth the price being paid, the final mortgage amount on offer to you could be reduced.
In this sense, there are certain features which should be avoided when considering properties to buy. Lenders prefer real estate that is in a good, habitable condition with only aesthetic renewal required at most. Furthermore, they have become more and more cautious about homes that are considered isolated.
In urban areas and prime locations such as the Alps or C�te d’Azur, the French property market is performing well. Although there may be wonderful bargains to be found in rural areas elsewhere across France, caution should be advised. To put it simply, the banks will shy away from securing a mortgage against a property that may struggle to re-sell in the eventuality that it is repossessed.
If you are seriously considering buying out in France this year, it is advisable to make immediate contact with a reputable French mortgage broker. A good broker should have knowledgeable, English-speaking consultants who are able to foresee the particular factors which will affect your own individual application.
Having taken this advice, you will then be in an informed position to commence your property search. A good broker will then be able to oversee your application and receive more efficient service from the lender, in addition to potentially obtaining more favourable rates and conditions for the term of your mortgage. n
Jo Cowling is head of the French team at International Private Finance Tel: 020 7484 4600 www.internationalprivatefinance.com