Why buy property with a French mortgage?
- Credit: Dreamstime
Why buy a property in France with a French mortgage if you could raise funds through UK equity release or have sufficient savings? Sharon Hill explains the benefits
When buying a property in France, whatever the price, the money to buy it with has to come from somewhere of course. Most often people will take a French mortgage, raise finance on their UK property or, more rarely, use their savings.
Those using savings or raising finance against their UK property may not even realise that a French mortgage could be available to them, or may look at the lengthy list of documents required by the French banks and have second thoughts, preferring to use their savings or a UK equity release to purchase the property.
‘Why bother with a French mortgage?’ is one of the questions we are frequently asked; ‘interest rates are really low in the UK, why should I bother with all the French bureaucracy?’ is another.
Understanding the reasons why a French mortgage could be advantageous is a key part of the decision-making process. So, why take out a French mortgage?
Keep your cash!
First and foremost, keep your hard-earned cash for other projects. Once your money has been spent on the property in France, it is very difficult to release that money again without having to sell it. French banks aren’t keen on equity release and consider that they are not there to help people raise money on assets that are already owned.
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Frequently, people contact us after they have purchased, be it a few months or a few years, as they realise that they would rather have taken a French mortgage. They hear about the very low, long-term, fixed-rate mortgages that are available in France and are keen to benefit from the security offered and free up some cash in order to carry out other projects, start a business venture or simply replenish their bank account.
They call us to enquire about raising a mortgage, as you would with a bank or broker in the UK, and it is often a shock that it is not possible to raise finance unless you wish to carry out renovation works to the property or finance a very specific type of project.
Having spent all of their savings to purchase the property, owners are left asset rich but cash poor, and cash really is king as you can’t buy necessities and live off your assets unless you are able to gain an income from them.
This really is the number one reason to consider a French mortgage as most people do not know that you can’t simply mortgage a property you already own outright in France.
A post-purchase mortgage option does exist though and is useful to know about. In the six months to a year after the purchase it is possible to raise finance on the French property as a normal mortgage, subject to a number of conditions. This option could be beneficial for someone who has to complete on a purchase quickly and doesn’t have time to go through the mortgage application process in time.
Protect yourself from exchange rate risk
Borrowing money in the same currency as the property you own is always a good idea, as it reduces the risk factors should you need to sell it at some point. Swiss mortgages were popular with workers near the Swiss/French border but attracted a lot of negativity when the Swiss franc rose against the euro and suddenly people owed more than the value of the property in France. This is the risk you take if you refinance a UK property to fund your French purchase.
For example, mortgage borrowing in sterling could end up being far greater than the value of the property if the euro depreciates, therefore selling the French property will not pay off the debt. However, if the debt is in euros then you are eliminating this risk. It is safer if your exchange rate exposure from sterling to euros is on a monthly basis rather than on the entire value of your property.
If the property is an investment property (i.e. you earn rental income from it) the interest paid on your French loan is tax deductible, whereas if you pay interest in the UK this will not be the case. Furthermore, if the property is likely to make you liable for wealth tax in France you can deduct the mortgage amount from the property’s net value, thus reducing the value in the eyes of the tax inspector.
Security for your purchase
Buyers can insert a clause suspensive into the compromis de vente to make the purchase of the property subject to obtaining a mortgage, but this clause is only enforceable if the mortgage finance is in France.
Therefore, if you have a clause suspensive stating that you require a mortgage but your UK mortgage doesn’t come through, you would not be able to withdraw from the purchase and you risk losing your deposit, in addition to owing compensation to both the vendor and the estate agent.
However, with a French mortgage this same clause does offer protection, no matter how many times the mortgage is refused, which gives you a greater chance of securing the property and minimises the risk of you losing your deposit.
Each compromis de vente is different of course, so please remember to seek advice from a notaire or legal specialist concerning the requirements of the clause suspensive and other areas of the contract.
French banks will carry out additional checks on the property, which include a valuation to ensure that you are buying (and they are lending!) at a fair price. If the sale price is considered to be too high then a lower, more realistic price would be given.
The bank and notaire will also check that no ownership or existing mortgage deeds are registered against the property, thus giving further peace of mind to the buyer that they can safely proceed with the purchase.
Other things to consider
When you take out a mortgage, a legal charge is registered against the property on which you take the mortgage. It makes sense for the legal charge to be registered against the French property if this is the property you are using the finance to purchase.
A French mortgage will also help to protect you from negative equity in the UK if you were to raise finance by releasing equity from a property there. If the value of your UK property was to depreciate and you had put maximum leverage on it in order to raise the money for a French property, you may end up looking to raise finance in France in order to pay off some or all of your UK mortgage, only to find out that that is not possible.
There are a number of things to think about and it is important to take your own personal circumstances into consideration.
Sharon Hill is the owner of French Mortgage Direct
Tel: 0033 (0)4 37 06 53 82