This article, written by our Managing Director Fiona Watts, first appeared in French Property News – Sept 2019
The first thing to highlight is that a French mortgage is a loan in Euros that you obtain from a French bank. Since the credit crunch it has not been possible to get a mortgage, where the loan is secured on the French property, from a UK retail bank. Now your options are to use a Private bank (and be borrowing upwards of €1.5M) or a French bank.
Whilst not every bank in France is willing to lend to non-residents, there are a growing number of very attractive mortgage products available. And with rates starting at 1%, it’s worth investigating whether they would work for you.
Stick or twist – Fixed vs Variable rates French Mortgage rates
Non-resident French mortgages rates can be fixed or variable, just like in the UK; albeit they track the EURIBOR rather than the Bank of England base rate.
But let’s cut to the chase – the key difference in France is that you can fix the rate of your mortgage for the lifetime of the loan – up to 20 -25 years in some cases! When rates are as low as 1% (as they are now) that is an attractive prospect. In the UK it’s far more common to take out a fixed-rate mortgage where the interest rate is only guaranteed for 1 – 5 years, before automatically transferring to the standard variable rate (SVR) which is typically quite a few percentage points higher than the base rate. At that point, in the UK, you’d re-mortgage and swap onto another product at a lower rate than the SVR. And you’d carry on doing this every few years until you’d paid off the loan. In France this just does not happen a) because you can fix the rate for the life of the loan and b) because re-mortgaging is only permitted under a few circumstances and it is so expensive (you have to pay all the legal fees again) that unless the rate you are moving onto is at least 3 percentage points lower than what you are currently on, it really is not a financially viable option. So, make sure you seek expert advice when choosing your French mortgage product because changing it later will be very tricky.
Whilst the fixed-rate options are very attractive now, there are still great variable and capped variable products available to non-residents. A variable-rate tracks the EURIBOR; if the EURIBOR rises, so will your mortgage rate, equally if the EURIBOR doesn’t move, or it falls, so will your rate. A quirk of the French variable rate is that should the rate increase, the lender is more likely to extend the term of your mortgage, rather than increase the monthly payment – it’s one of several features that are designed to protect the consumer from unexpected payment hikes. A capped variable rate works the same as a variable rate but with a cap – that will stop your interest rate going above a certain percentage, irrespective of what happens to the EURIBOR. It’s another ‘safety feature’, giving you a bit more certainty over what could happen to your monthly mortgage payments in the longer term.
Another favourable difference from the UK is the early redemption charges (ERCs) – or rather the lack of them! Most variable and capped rates do not have any ERCs and the ones attached to a fixed rate French mortgages are significantly lower than we are used to in the UK; six months interest to a maximum of 3% of the outstanding balance i.e. on a loan amount of €250k and a rate of 2% the penalty would be €2,500. This is particularly important for buyers, who could afford to buy in cash but instead part-finance the French purchase with a French mortgage to reduce the sterling cost. They may therefore want to repay the facility early if, over time, the exchange rate moves back in their favour.
Repayment and Interest-Only French mortgages
There are far more repayment mortgage products available non-residents than interest-only. The latter are popular since the monthly repayments are significantly lower, but typically the maximum loan to value, or LTV (the proportion of the purchase price that the bank is willing to lend), is around 75%, compared to 85% (and in certain circumstances, 100%) on a repayment basis. Interest-Only mortgages are also only available on a shorter term – a maximum of 15 years in most cases. More recently, lenders have been trialling new ‘hybrid’ products, where you can have a mortgage for 15 years, where the first 5 are on an interest-only basis, and then the remainder are on a repayment basis. These are popular with borrowers who want to keep the initial monthly payments to a minimum. Such as borrowers who know their outgoings will reduce in the medium term (e.g. no more school/university fees to pay) or purchasers with a UK property to sell or who are expecting an inheritance and are planning to pay off the mortgage early.
Buy-to-let French Mortgages
Buy-to-let mortgages (BTL) in the UK will typically have higher interest rates than a ‘regular’ residential mortgage. However, these BTL products don’t exist in France. Instead, you can get a regular residential mortgage, like the ones we’ve explained above, at the current low rates and rent your French home out as you please, either on a seasonal or longer-term basis. However, the quid pro quo is that the French banks will not take any of the future rental income into consideration when assessing whether you can afford the monthly payments; this is regardless of how consistent or high you believe the rental income will be. But if you can afford the mortgage without the rental income, you can then use it to service the mortgage payments.
Don’t be caught out by ‘headline’ French mortgage rates…
Unlike in the UK, the French banks don’t typically display the APRC (the actual interest rate, once all costs associated with the mortgage are taken into consideration) alongside the headline rate. They also don’t always make it clear mandatory conditions are attached; conditions that can add a considerable amount to your monthly payments.
Firstly, check the term of the mortgage. For example, a non-resident can get a mortgage at a fixed rate of 0.87% at the moment, but that rate is only available for a 5 year term on a capital repayment basis (not interest-only).
Next, verify whether you must take out life insurance. Most French banks will require you to have cover for the full term of the mortgage and often they stipulate that it must be the bank’s chosen provider (although some may waiver it completely and others allow you to use your existing UK or French cover). Assuming you are a healthy, non-smoker in-house insurance products will be around 0.46% of the loan amount/year – which based on a €250k loan and a headline mortgage fixed repayment rate of 1% will increase your monthly mortgage payment from €1,150 to €1,245 (which is the same monthly payment as a 1.8% rate).
Lastly, some products are only available if you also place money with the bank (often 25% of the loan amount or more). This must be in Euros, and for the lifetime of the loan. So, whilst you might be borrowing at an 85% LTV, the reality is that on top of your 15% deposit (and the notaires and bank arrangement fees) you have to place a further 25% cash with the bank. Which means you are still having to convert 40% of the loan amount into Euros – making the LTV more like 60%.
Despite the often-opaque nature of the French mortgages, there are some fantastic non-resident products and exceedingly low rates available. To be sure you get the best deal for you and your personal circumstances and future plans, and to be able to compare quotes from multiple lenders, it really is advisable to work with an FCA and ORIAS-regulated French mortgage broker. An experienced consultant will be able to assess your eligibility across the whole market and will be able to advise you on which products would be most suitable. It will save you a whole lot of time and money and give you the peace of mind that you are getting the best deal for you.