Ask the Experts: buying with a mortgage or cash?

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Should I pay in cash or take out a French mortgage?

We intend to purchase a property in France this year in order to make a permanent move there. Our plan is to sell our UK property and as a result we would probably have sufficient funds to pay cash in France. However, I wonder whether it would be more financially advantageous to obtain a French mortgage? What would we need in order to qualify for this and what is the application process? Also, does equity release exist in France?

Luke Benson

Simon Smallwood of International Private Finance (www.internationalprivatefinance.com) replies:

This is quite a common dilemma for British buyers in France. Fully relocating to France often means that the buyer has sold a UK property and can purchase in cash. It is, however, always important to assess the other financing options available. This has never been truer than at present, as French mortgage rates are so appealingly low.

Before considering the factors which may affect the arrangement of a French mortgage under these circumstances, it is worthwhile first of all to address your final question on equity release in France. While technically available on the French market, access to equity release mortgages is very restricted. French banks are uncomfortable with this type of financing and, as a result, the affordability criteria are very strict and the rates and terms are less favourable than for purchase mortgages.

The most opportune moment to take out a French mortgage is therefore at the time you purchase the property. Furthermore, by doing so, you can reduce your foreign exchange exposure. If you buy in cash, all your sterling savings must necessarily be transferred into euros right away. This puts you very much at the mercy of the exchange rate at that particular moment.

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On the other hand, purchasing with a French mortgage will see a certain percentage of the funds – generally up to 80% – released by the bank directly in euros. You can then benefit from the low interest rates by paying back this mortgage over the coming months and years, all the while keeping an eye on foreign exchange rate movements. If sterling strengthens significantly at a later date, you will then be able to transfer a lump sum of your savings over to euros at a more beneficial rate and pay off a large part of your remaining mortgage capital, thereby reducing the sterling cost of completing your French purchase.

In this way, taking out a French mortgage can help you to minimise the foreign exchange risks involved in buying a property in France. Many of the French mortgages available do not include early redemption penalties, to ensure that you benefit fully in this regard.

Please do nevertheless bear in mind that, in order to set up a mortgage, the French bank needs to be convinced that you will be in a position to make your monthly repayments after relocating to France. As the UK residence is being sold to raise funds, the bank will ask how your financial profile will be affected by moving across the Channel. Will your job relocate you? Will you be drawing a pension? French banks require reassurance that a dependable level of income will still be drawn after the move.

Unfortunately, this reassurance cannot be provided by way of your plans to set up a business in France, for example by using your property as a gîte. The underwriters will not take potential future income into account when studying your application on a financial basis.

In order to secure a French mortgage at the present low rates, it may therefore make more sense to purchase as a second home in the short term. Your earning situation will not be affected, so monthly repayments can be made until foreign exchange rates move in your favour, and you can pay the mortgage off when relocating at a future date.

The permutations in these situations are always complicated and unique, and it is always advisable to consult an expert French mortgage broker in order to find a bespoke solution to your particular requirements.