Rate of return - How to get the best mortgage
Make sure you understand the differences between the various mortgages on offer before you select one, says Louis Mann
In my previous two articles, I have looked at the mistakes commonly made by prospective buyers and key lessons to learn when applying for a French mortgage. I am finishing this series of articles by highlighting some of the major differences between UK and French mortgages to enable you to identify the correct mortgage for your needs.
TYPES OF FRENCH MORTGAGE Firstly, let us look at the types of French mortgage on offer. Although it may seem that French mortgages are more limited in scope than those in the UK, they are nonetheless complex in function. French lenders offer three categories of home loans: repayment, interest-only or a combination (one phase interest-only, followed by a second phase of repayment).
Generally, the French tend to be mildly risk averse and are less comfortable with debt than those in English-speaking countries. This may explain why the French traditionally prefer fixed-rate products, which have a fixed rate, fixed term and fixed monthly payments. In brief, worry free, whatever events lie ahead.
However, this peace of mind can come at a cost with higher rates and sometimes more restrictions and penalties for early redemption. Variable mortgages on the other hand can be an interesting alternative, especially at a time of low interest rates. It is these types of mortgages that throw up the most differences in the way they are quoted, in the way they operate and ultimately, in their cost.
THE EURIBOR RATE You may have seen how French variable mortgages are often quoted as threemonth Euribor plus margin of 2.5%’, or 12-month Euribor plus margin of 1.5%’. What on earth does this mean and, more importantly, which one is cheaper? To help demystify this, let us look at the term Euribor’. It stands for the Euro Interbank Offered Rate and is based on the average rate at which European banks will lend to each other. Simply put, this rate represents the wholesale cost of money. The rate is quoted in a wide range of averages, including daily, one week, one month, three months and 12 months, and these averages vary from day to day. Typically, the weekly rate will be more volatile than the monthly, three-monthly or yearly rate, as its average is taken over a shorter time.
As for the margin, this is what the bank is charging you for that particular loan and this can vary wildly from lender to lender and from product to product.
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So what of the examples above? At the time of writing, the three-month Euribor is quoted as 0.71%, which when added to the margin of 2.5% means the rate the lender will charge you is 3.21%. Interestingly, the 12-month Euribor is 1.2%, so coupled with the margin of 1.5% gives you a rate of 2.7%. Naturally, this is only part of the picture and you need to be aware how often your rate and monthly payment will be adjusted, so the rates need to be put into context with other aspects and conditions of the loan; it certainly pays to dig a little deeper to see what lies behind the advertised rate!
Another surprising difference to the UK is that, often, rate fluctuations do not necessarily mean the French lender will make a change to your monthly or quarterly payment. An attractive and reassuring element of some variable products in France is that, rather than the amount you pay back changing in accordance with movements in the Euribor, the term – or length – of the mortgage will change, thereby allowing easier budgeting and, of course, one less thing to worry about! If the rates increase, the mortgage itself will simply get longer. Some loans even allow for it to work the other way. If rates fall, the monthly amount stays the same but faster amortisation means the loan is being paid off more quickly and hence a shorter loan duration!
When comparing different mortgage options in France, it can be useful to calculate the entire cost of the acquisition using each option over a given period. I find this helps to determine the true cost of each mortgage, and thereby allows for a fairer comparison. So, for each mortgage option, you add together the amount of your required deposit, any bank fees, registration fees, agent immobilier fees (as these can be excluded from some loans) and, as much as you can, the total amount of repayments you will be paying over a two-year period, for example. By doing this, you can avoid being swayed by an enticing introductory rate. For anyone looking at different mortgage options, it is imperative to work out what will best suit your needs. Interest-only may be attractive to help keep monthly costs down, but what if it is not fixed? What happens if the rates rise in the future? Remember that current rates are at an all-time low and are unlikely to get any lower. How do you intend to pay back the interest-only loan in the future?
If you are looking at a repayment loan, is it worth opting for a fixed rate, or would it be better to opt for a variable product at a lower rate and move onto a fixed rate at a later date? If you plan on paying off your loan before the term ends, for example from the proceeds of the sale of a house in the UK, what are your exit costs? Are there redemption penalties to pay? As an alternative, can you make large overpayments? To ensure you make the right decision, you need to ask these questions and be satisfied with the answers. Always remember that, if you speak to a lender directly, they will only be able to tell you about the mortgages they sell, none of which may even be suitable for you and your needs.
In sum, a full understanding of the debtto- income ratio, the Euribor rates and the margin are essential if you are to make the right mortgage decision. If your New Year’s resolution is to buy your dream house in France in 2010, remember to look at your finance options first and then, with that knowledge, get across the Channel and househunt!
How to get the best loan for you � Calculate the entire cost of the acquisition over a given period, say two years � Don’t forget to consider the effect of rising interest rates � Make sure you take early redemption fees and overpayment penalties into account � Compare several options (interest-only, variable, repayment) and several products (12-month vs three-month Euribor) to ensure you are getting the best deal � Compare products from several lenders
Louis Mann, director, Validus Financial Services Tel: 020 3142 6203 www.validusfs.com