Why financially savvy buyers are purchasing French homes with a mortgage
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Mortgages don’t tend to be considered a money-saving trick, but the differences between French and UK mortgages mean that taking out one in France, even if you can afford your property in cash, could work to your benefit, says Fiona Watts
In recent years non-resident French mortgage rates have been remarkably low: they are still between 1-2.7% depending on the LTV and term and can be fixed for the lifetime of the loan. A cautious investor can expect a 4-6% annual return on investments they have now. Therefore by keeping your cash invested it will earn around 6%, while your mortgage loan will cost 2% in interest.
While your mortgage payments won't change as the rate is fixed, the interest you would earn on your savings (the money you would have spent on a cash buy) will increase if the interest rates continue to rise as predicted.
One of the main differences between French and UK mortgages is the size (or lack) of early repayment charges. There are typically no overpayment/full redemption penalties for variable rates and only very small ones for fixed rates. This means you can mitigate the current weak exchange rate, as paying back your mortgage early is not a costly exercise. By taking out a mortgage you only need to exchange the deposit amount.
If the exchange rate recovers, you could pay back your mortgage in full - and when you transferred the capital you would be doing it at a much more favourable rate. So the sterling purchase price of the property is reduced!
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French wealth tax (impôt sur la fortune immobilière) kicks in at €1.3. However, if you are buying for more than €1.3m, you are only liable for the net value of the property, so are able to deduct the loan amount off the property's value and and you only pay tax on the remainder. This means that if you take out a French mortgage, you pay less wealth tax.
Cheaper to borrow
Although you cannot get a UK mortgage on a French property there are various other options, such as borrowing against existing UK property by releasing equity or taking out a lifetime mortgage, home reversion loan or personal loan. However all of these options will likely be more expensive than taking out a French mortgage, where rates can start at just 1.8% for 20 years at an LTV of 20%.
With French mortgages there are also no restrictions around renting the property out and you do not have to apply for a 'buy-to-let' mortgage as in the UK. Therefore if you decide to do some seasonal or long-term rentals, you can charge the tenant in euros and use this to pay your mortgage costs.
Fiona Watts is the managing director and co-founder of mortgage broker International Private Finance
For more information about French mortgages, and for more excellent money-saving tips, click here to purchase the latest issue of French Property News!