When in France...
Jo Cowling offers 10 reasons to choose a French mortgage to finance the purchase of your French property
1) Increasing UK (domestic) financing costs
Over the past 15 years, most people who have purchased a second home in France have financed the transaction by raising funds against their primary residence. While this is still possible, the credit crunch has made it more expensive due to the fees involved and high rates charged. It has also become more restrictive in terms of what domestic lenders will allow you to do with the money once it has been raised.
While interest rates are at historic lows, the interest rates that banks are charging to provide finance in the UK are not. Sterling’s weakness against the euro can make this option increasingly expensive.
When taking out a French mortgage, the French lender will invariably carry out a valuation of the property to ensure they believe it is worth what you (and consequently they) are paying for it.
Whether or not they visit the property depends on the cost of the property, the loan-to-value (LTV) of the mortgage and the location of the property. Although the full valuation results are not generally made available to the client, you will nevertheless have the peace of mind that the property’s value has been assessed.
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3) Renovation projects
Renovating a run-down property in France is popular. However, it can be more complicated when you need finance to complete the renovation works. If you are looking at completing a purchase and renovation of a property, the most hassle-free way to finance the transaction is to use a mortgage to finance as much of the purchase as possible and use your own funds for the renovation work.
However, if you do wish to finance the works, lenders will insist on using a French-registered builder to complete the renovation and also carry out a valuation. This provides peace of mind with regards to the quality of the work being carried out and also the final value of the property.
4) Capital raising
Many people who have purchased French property over the past 10 or 15 years now find themselves owning their property in France with no mortgage and �/€ exchange rates at around 1.15. In many cases, when the property was purchased, exchange rates were between 1.30 and 1.50. With exchange rates at current levels it is becoming increasingly popular to consider raising money against your French property and then bringing the money back to the UK to pay down existing debts or purchase UK property.
5) Low interest rates
European interest rates are at historic lows and, while lending is comparatively expensive in the UK, this is not the case in France. During the good times’, French lenders were more cautious than their counterparts in the UK, US and Ireland. The consequence of this is that they are in a better position to lend now – and for people who are looking to purchase a second home in France they will do so at incredibly low, long-term rates. Variable rates in France start at around 2.2% with fixed rates being available from 2%.
6) Financial planning
There are a number of reasons why it may make more sense to have a small mortgage secured against your French property compared with purchasing it outright in cash.
Apart from the exchange rate issues (see below), there can be wealth tax benefits to having a mortgage secured against your French property. What’s more, if you are renting out your property, you may be able to offset the rental income against the interest you pay on your French mortgage. Always consult an independent tax consultant on these issues.
7) Exchange rates
Borrowing money in sterling to buy a property valued in euros can be a headache if the exchange rate moves in the wrong direction.
If sterling strengthens against the euro (which the majority of economists predict in the next few years) and you’ve used a sterling mortgage to finance the purchase of your French property, you could in effect see the sterling value of your French property go down, while the sterling value of your mortgage stays the same. Borrowing some money in the currency the property is valued in will help protect you against such exchange rate movements.
Furthermore, as sterling strengthens, the sterling value of your monthly euro mortgage payments will actually go down!
8) Financial flexibility
With uncertainty in many of the world’s economies, it may make sense to keep a little more cash than normal in your bank account for a rainy day! Even if you can afford to purchase a property outright, it might be a good idea to take out a mortgage, as this is much easier to do at the time of purchase than later on, and historically low interest rates and a strong appetite to lend from the French lenders against property in France make this more appealing than it once may have been.
9) Mortgage costs
While raising money against a French property you have purchased in cash is possible, as mentioned above, it is generally more expensive to do so than raising finance at the time of purchase.
If you are looking to purchase a property soon and think raising finance may be a requirement in the near future, it is worth looking into whether you are eligible for a French mortgage beforehand and what the costs will be, rather than raising finance at a later date.
10) Live the dream
With interest rates at historic lows and the French property market performing robustly compared with others, a French mortgage may mean your French property ownership dream can become a reality!
Jo Cowling is a French mortgage adviser at International Private Finance
Tel: 020 7484 4600