Mortgage expert Jo cowling provides some answers to questions asked at a recent French Property Exhibition in London
As part of September’s French Property Exhibition at Olympia, International Private Finance hosted a series of seminars on French mortgages. The format was slightly different from usual as the audience was invited to propose which topics they would like to hear covered, and these were then discussed.
Here we have provided a summary of the most popular questions that were raised during the seminars, along with their respective answers.
If I am looking to take out a mortgage to finance the purchase of a property in France, what are the options open to me?
There are three options:
1) Raise money against your primary residence or property in the UK, by way of a UK mortgage.
2) Take out a mortgage secured against the French property with an international lender.
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3) Take out a French mortgage, secured against the property with a local French bank.
Mortgage lenders in the UK are unable to secure finance against property in France, as they can’t take a legal title over the property. If you raise money against your property in the UK in order to complete the purchase in cash, you need to be aware that you will be borrowing in sterling to finance the purchase of a property that is valued in euros. This will therefore create a potential exchange rate liability.
Some international lenders, private banks and banks which are based in offshore jurisdictions have the ability to secure finance against property in France. While these banks can provide finance in different currencies and to properties owned in different structures, their solutions are often more expensive than those provided by French lenders.
These mortgages are generally only available for larger loan amounts (above €500,000) and often require the development of a wider private banking relationship.
Domestic French mortgage lenders will typically provide the most attractive interest rates and competitive terms. Each of the lenders will have significantly different criteria, so it is advisable to work with a French mortgage broker who will guide you in the direction of the most competitive product for your circumstances. Good French mortgages brokers may also have access to discounted rates and products that are not available when approaching the lenders directly.
How is affordability calculated for a French mortgage?
Mortgage lenders in France calculate affordability differently from lenders in the UK. UK mortgage lenders will base the amount you can borrow on your income, using earnings multiples of three, four or five times your income to decide what is the maximum amount you can borrow.
French mortgage lenders, on the other hand, work on a debt to income’ ratio. The French lenders will allow between 30-40% of your income to be taken up with repaying your existing mortgage and debt commitments, in addition to your new French mortgage.
The French banks have, over the summer of 2011, tightened their criteria with regards to rental income for owners of buy-to-let properties. The majority of French banks will take 100% of the mortgage repayments into account when assessing mortgage eligibility. Although varying from lender to lender, they will then only consider around 75% of the rental income that is generated by those properties.
French mortgage lenders have also started looking at the total existing mortgage debt a borrower has, and will only allow the total outstanding mortgages to equal a maximum of up to six times the gross annual income of the borrower. This new criteria has a particular impact on borrowers with large property portfolios, and is a result of the new Basel 3 banking directives being introduced by the European Union.
The final variable that the French mortgage lenders take into account is the residual income the borrower has left on a monthly basis, after their existing outgoings and new French mortgage commitments have been taken into account. Different lenders have different criteria as far as this is concerned, and it will often depend on the overall level of the applicant’s income.
Have French mortgage lenders’ desire to lend been affected by the financial turmoil over the past few years?
The French property market has performed robustly during the recent financial turmoil, particularly when compared with other, historically popular, overseas second-home markets. One reason for this is that the majority of property purchases that take place in France are of existing, resale properties.
This robust structure of the property market has ensured that French mortgage lenders have retained a strong appetite to lend to borrowers who are looking to purchase a second home in France.
French banks have started to differentiate between lending against new developments and investment properties, compared with those which are being purchased for use as a second home.
For that reason, if you are considering purchasing a leaseback or new-build property, it is worth confirming with your French mortgage broker as to whether lenders will consider financing a particular scheme.
What types of mortgage products are available in France?
Although both interest-only and repayment mortgages are options in France, capital repayment options are much more widely available.
Some French banks offer interest-only mortgage options for an initial period of between two and five years, with the mortgage subsequently reverting to a normal repayment mortgage.
The criteria for interest-only mortgages is also much stricter than for repayment mortgage options, particularly as they require you to prove sufficient assets to repay the capital sum at the end of the interest-only period.
As far as interest rate options are concerned, there are three types of mortgage available: variable rate, fixed rate, and cap and collar’ mortgages.
Variable-rate mortgages have the advantage that they are the most flexible options and generally don’t have penalties for early repayment. They do, however, leave you exposed to potential increases in interest rates.
Fixed-rate mortgages are hugely popular in the French domestic market, and products are currently available that allow you to fix your mortgage from 4.25% for the entirety of a 20-year term. The benefits of fixed-rate loans are that they protect you against any future rises in interest rates, but they do often incur redemption penalties if you look to repay the loan early.
Capped and collared mortgage products have gained popularity over recent years, as they combine the best aspects of both of the products mentioned above. The interest rate you pay is normally capped at around 1-2% above the initial starting rate, and cannot fall by the same amount below the initial starting rate.
Generally, however, these mortgages don’t have redemption penalties for paying off the mortgage early. They therefore provide peace of mind that your monthly mortgage repayments can’t rise above a certain level, while providing the flexibility that overpayments can be made without penalty.
It is typically possible to borrow up to 90% of the value of the property you are purchasing in France. However, do note that borrowing 80-85% of the loan amount is much more widely available through a number of lenders.
How long does it take to arrange a French mortgage?
Typically when you sign a compromis de vente in France, the completion date will be set at around three months after the date on which it is signed. You should normally allow between 10 and 12 weeks to complete on your French mortgage.
The process can be completed in a much shorter timeframe if all documentation is provided without delay. Nevertheless, there are some delays which cannot be avoided, such as the mandatory 11-day cooling-off period for mortgage applications which has to be adhered to under French law.
Jo Cowling is head of the French team at International Private FinanceTel: 020 7484 4600www.internationalprivatefinance.com