Stumping up the cash
Unsure where to start with buying in France? Jo Cowling provides an A to Z guide to French mortgages and the property buying process
Rather than using earnings multiples to decide how much you can borrow, French lenders work on debt-to-income ratios. As a rule, the French lender will allow between 30 to 40% of your gross income to be used to pay all existing mortgage and loan commitments in addition to your new French mortgage.
B Bridging finance
Bridging loans between one French property and another are available in France. However, French lenders are generally reluctant to do this unless you are planning to take out a long-term loan on your property.
C Currency exchange
Using a currency broker is strongly advised when transferring money to France. Whether you are transferring a large sum to purchase a property in cash, a smaller amount for a deposit or already making monthly mortgage payments, a currency broker will provide you with substantial savings compared with a high street bank. It is important that you use an established and secure foreign exchange provider.
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You generally pay your deposit when you sign the compromis de vente (sales contract). The deposit will normally be around 10% of the purchase price of the property.
The interest rate you pay on your French mortgage will almost certainly be linked to the Euribor (European Interbank Offered Rate). The exact rate you pay depends on which Euribor index the mortgage product tracks. The most common index is the three-month rate, although the six-month and 12-month rates are also frequently used.
The fees associated with purchasing a property in France are slightly higher than those in the UK. Estate agency fees (usually 4-10% of the purchase price) are payable by the buyer, although there is a perception among vendors that property prices are cheaper in order to compensate for this. If you are raising a mortgage on the net purchase price, it is important to understand how much of your purchase price is made up of agency fees. Notaire’s fees (around 7.5% for a resale property, 3% for a new-build) are also charged to the buyer, the bulk of which is tax that goes to the French government. If you are taking out a French mortgage, you would normally expect to pay an arrangement fee to the lender of around 1% of the loan amount. You will also pay an additional notaire’s fee of around 1–1.5% of the loan amount to register the deed of the mortgage.
Most French lenders will not finance g�tes. For those that do, affordability is calculated like a normal purchase; you will need to be able to prove to the lender that you have sufficient income to service the mortgage. The rental income produced by the g�te is very unlikely to be taken into account by the underwriter.
This is the generic French term for a mortgage. It is the charge taken over the property and is therefore a term that will come up fairly regularly. There are different types of charge depending on the type of transaction you are looking for.
In order for the notaire to be able to complete your French purchase, you will need to ensure your property is properly insured. Be aware that many French buildings and contents insurance policies don’t include public liability cover – important if you’re renting the property out – or cover a holiday home that is left empty for more than 30 days at a time.
J Joint applications
If purchasing a property under more than one name, all the buyers must be included on the mortgage application. If you and your co-purchasers live in different households, be aware that lenders will generally expect all applicants to be able to afford monthly repayments on their own.
Always ensure that things proceed as smoothly as possible by talking to all the relevant experts. Independent legal and tax advisers, foreign exchange specialists, French mortgage advisers, and buildings and contents insurance providers, can all save you a lot of time and money in the long run.
L Loan-to-value (Ltv)
The maximum LTV available on a mortgage in France is typically 100% of the net purchase price. Strict criteria must be met to secure these products. As a rule, a 15–20% deposit is required to purchase a French property with the most widely available mortgages.
M Monthly repayments
A quirky rule often associated with French mortgages is that when the mortgage interest rates change, your monthly repayments do not alter. Instead, the term of the mortgage is modified. If interest rates go down the term of your mortgage will shorten, and if they go up the term of your mortgage will extend.
The notaire looks after all legal aspects associated with completing the French property purchase. Notaires are employed by the French state and also collect the taxes incurred when buying property in France.
Once your mortgage application has been approved, your mortgage offer will be issued and sent out to you via courier. Under French law, the offer cannot be returned until an 11-day cooling-off period’ has expired. If you post-date the offer and return it before this 11-day period has expired, the offer will need to be re-issued and the cooling-off period will start again.
Fixed-rate mortgages in France generally have early redemption penalties during the fixed period, when overpayments are subject to a surcharge of around 3% of the outstanding capital. Variable rate mortgages generally don’t have redemption penalties, unless you are changing your mortgage from one lender to another. There are always exceptions to these rules, so ensure you are well-informed!
It is often difficult to obtain a mortgage quotation from French lenders before you have made an application with them. The rates and products available will always depend on your financial situation, and may also depend on the number of other products (insurances and credit cards, for example) that are taken out simultaneously. A good French mortgage broker will be able to assess your circumstances and provide you with a quote based on the mortgage products you qualify for.
Most mortgages in France are taken on a repayment basis. Interest-only mortgages are available, but they most generally only have an introductory interest-only period before reverting to a capital and interest repayment mortgage.
This stands for soci�t� civile immobili�re, and essentially denotes a French company that is owned by shareholders and used as a vehicle for the purchase a property in France. Most French lenders will finance a property purchase within an SCI structure.
The maximum mortgage term in France is currently 30 years, although 20 years is more typical. If, as explained earlier, the mortgage term is affected by changes in the interest rate, it will generally only increase/decrease by a maximum of five years.
French lenders often employ different teams of underwriters and credit committees, depending on the size of the loan applied for. A French mortgage broker should have direct contact with the underwriters and a full understanding of their criteria.
This is the French term for an off-plan property. There are numerous developers in France who offer investors the possibility of buying a property before it has been constructed.
W Wealth Tax
Wealth tax in France is currently payable on the value of all assets owned above a threshold of €780,000. Many savvy owners of French property choose to have a mortgage secured against their French property, so that in the eyes of the French tax man the net’ value of the property falls below this threshold. For example: if you own a property worth €1 million and you have a €500,000 mortgage secured against it, the net’ value of the property in terms of wealth tax is reduced to €500,000.
If you are thinking about purchasing a property from an ex-husband, ex-wife or ex-partner, it is possible to arrange a mortgage to finance the transaction. This is a comparatively complex process compared with a straight purchase, but you will be able to finance up to 100% of the share being bought. This is so long as the total loan-to-value of the mortgage does not exceed the maximum LTV on that particular product.
Y Why use a broker?
A good French mortgage broker will be able to take a huge amount of the potential pain out of the French mortgage application process, in addition to being able to give you access to reduced rates and margins that would not be available when approaching lenders directly. If the broker you use speaks both English and French, they will also be able to work with you throughout the process, liaise within any of the third parties involved in the transaction and ensure you have a choice of mortgages from the widest possible panel of lenders.
Having completed the purchase of your dream French property, you will be able to sleep soundly, safe in the knowledge that you are the proud owner of your own piece of France!
Jo Cowling is a French mortgage adviser at International Private Finance
Tel: 020 7484 4600