Round the houses
If you’re buying property in France, it could be worth exploring the option of a French mortgage, says Jo Cowling
Over recent months there has been increasing coverage in the UK press regarding the availability of interest-only mortgage products. Historically, interest-only mortgages were only available in the UK if you could prove to the lender that you had some sort of savings vehicle in place to repay the capital sum of the mortgage at the end of the mortgage term.
However, as the mortgage market became more competitive and the availability of products more widespread, it became increasingly possible for individuals to take out interest-only mortgages with no provisions in place to repay the loan at the conclusion of the term. This approach is fine in a market where property prices are rising continuously but when this is not the case, it will cause problems.
Mortgage lenders in the UK have for a while been looking at ways they can reduce their exposure to credit risk. This has been achieved by reducing the loan-to-value they are making available to individuals, as well as increasing the margins they are offering new clients.
More recently, lenders have started to reduce the availability of interest-only loans, in particular for loans above �500,000. While some lenders have withdrawn from the market entirely, others are once again starting to ask for proof that the individual has a method in place to repay the mortgage.
Interestingly, this brings UK mortgage lenders much more in line with their French counterparts. During the boom years between 2005 and 2007, French banks were considered far too cautious and were even accused of stifling growth in the French property market.
The credit crunch caused a huge contraction in the UK, US, Irish and Australian mortgage markets, with lenders’ risk appetites being severely restricted. While the French market also tightened, it was nowhere near as significant, with the lenders only withdrawing products that they perceived high risk, i.e. equity release and capital-raising products.
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The majority of French banks maintained their appetite for lending to clients who were looking to purchase property in France and in many instances actually improved the terms available to non-residents.
As we outline in this article, UK lenders’ criteria for full-term interest-only mortgages are now very much in line with the banks that offer these products in France. This consistent approach to mortgage lending has left the French banks in a strong position and, equally important, has left French property prices performing much more consistently than many other markets.
Which products are currently available?
Below you’ll find a guide to the repayment options available to non-residents in France, along with a summary of the mortgage products you can choose from in the French market. There’s also an explanation of the criteria you will need to meet to ensure you are eligible for these products.
Repayment mortgages (or capital repayment mortgages) are far and away the most commonly available mortgages on the French domestic market. This means that the capital sum is repaid over the term of the mortgage.
The monthly payments on a capital repayment mortgage will be higher than an interest-only equivalent, for the simple reason that in addition to the interest, you are also paying back some of the capital sum on the mortgage each month.
As the repayments are higher, repayment mortgages mean that you need a higher income with this type of mortgage than you would with an interest-only option.
Typically, for a repayment mortgage, the borrower will need to have a debt burden (the ratio between their gross income and their total monthly repayments of existing mortgages, loan commitments and the new French mortgage) of between 30% and 40%.
Because the capital sum is being repaid over the term of the mortgage, lenders are generally more comfortable with agreeing to mortgages where the debt burden is at the higher end of this range.
Interest-only options are far less common in France than in the UK, the US, Australia or Ireland. Essentially there are two options; full-term interest-only mortgages and short-term interest-only mortgages, which are explained in greater detail below.
These products are fairly rare in the French mortgage market and allow the borrower simply to repay the monthly interest that accrues on the loan. At the end of the term of the mortgage, it is the borrower’s responsibility to pay back the capital sum of the mortgage.
As a general rule, the criteria for a full-term interest-only mortgage allows borrowers to have a debt burden of between 30 and 35%.
However, unlike repayment loans, the borrower needs to prove that they have net assets (property, investments, pensions, savings, not including business assets/ shares) to the value of between 120% and 150% of the loan amount they are looking to borrow. It is important to note that it is not possible to use any equity in the property you are purchasing in this calculation.
The reason that lenders look for this level of assets is to ensure that you have sufficient funds in place to pay off the outstanding capital sum at the end of the mortgage term.
Short-term interest-only products
The more common interest-only mortgage options in France offer an initial interest-only period for a specified period of time (often two to five years) before the loan reverts to a standard repayment mortgage for the remaining term. As the capital sum is going to be repaid at the end of the mortgage term, the lenders will look at this type of mortgage as being of similar risk to a straightforward repayment mortgage.
Fixed-rate mortgages in France are the most popular on the domestic market and for this reason they are the mortgage products that French lenders feel most comfortable offering.
As a general rule it is possible to fix your mortgage rate for one, two, five and 10 years or for the full term of the mortgage. If you only choose to fix your mortgage for a shorter period of time (five years for instance), it is important to be aware that your mortgage is likely to revert to a tracker product at the end of the fixed-rate period. The interest rate you pay will normally be linked to one of the Euribor base rates plus a margin.
Fixed-rate mortgage products will normally incur redemption penalties if the mortgage is paid off during the fixed-rate period.
Variable-rate mortgages are less common in France. The interest rate you pay on these mortgages will generally be fixed for between three and 12 months. After this period they will revert to tracking the Euribor base rate plus a margin (an interest rate, over and above the base rate that you pay on the mortgage). The margin is fixed for the life of the mortgage – it is just the base rate that is susceptible to change.
Interestingly with French mortgages, if the interest rate on your mortgage increases, the lenders do not increase the monthly repayments but they extend the term of the mortgage (normally by a maximum of five years). Likewise, if the interest rate on the mortgage decreases, rather than reduce your monthly repayments, the lender will actually reduce the term of your mortgage.
Variable-rate mortgages do not generally have any early repayment penalties once the initial introductory period is over. The criteria (debt burdens etc) offered by lenders will be the same as for straightforward repayment loans.
Capped and collared rate
Capped and collared mortgage products are very popular in the current climate and are essentially a hybrid of the variable and fixed-rate products. The starting rate for the mortgage is normally fixed for around one or two years and then cannot increase or decrease by more than one or two percentage points during the life of the mortgage.
One of the major advantages of this type of product is that they generally don’t have any redemption penalties during the life of the mortgage. Therefore, not only are you provided with the peace of mind of a fixed rate mortgage product, but you also have the benefits of a variable rate, such as the flexibility to pay the loan off at any stage.
Hopefully, this has given you a good idea of the types of mortgage options that are currently available in the non-resident, French mortgage market and an idea of the criteria required for the different products.
Jo Cowling is a French mortgage adviser at International Private Finance
Tel: 020 7484 4600