26 April 2008 - French Mortgage News | International Mortgage News | Partners News | Uncategorized |

Take interest in the Euribor

The following article was published in French Property News April 08 

Take interest in the Euribor

Opting for a French mortgage rather than making a cash purchase could give you the edge, reports Jo Cowling

Recent events in the world’s financial markets mean that these are uncertain times for those considering purchasing property, whether at home or abroad. The UK housing market is faltering, with mortgage approvals down to levels not seen since 2005, and you could be forgiven for thinking that there may be repercussions in the French market, especially in areas which are popular with overseas buyers. This is creating nervousness for people thinking about purchasing property in the UK and also those considering a purchase in France.

The problems and unease in the property market in the UK have been caused in part by the liberal lending by UK mortgage lenders and banks, which has in turn led to tighter lending criteria and reduced product availability across the board. This Although there have been two cuts in the LIBOR base rate in the last 6 months, margins have risen, and the most competitive products now have very strict stipulations and are not available to everyone.

What is more, this global financial uncertainty has been partly responsible for sterling weakening against the Euro by around 12%, from 1.51 in February 2007 to around 1.33 in February 2008. This change means that it has become significantly more expensive to purchase a property in France if you are converting sterling to Euros to pay for it.

So, with confidence low and French property prices having effectively increased in price by about 12%, people could be forgiven for thinking that this may not be the ideal time to make a purchase across the channel.

The news is not all doom and gloom however. These issues have not had such a negative impact on the French market, as lending criteria for both residents and non-residents have always been tighter than here in the UK or Ireland. The French property market is still very healthy, and both resale and new properties are proving very popular both with residents and non-residents alike. According to the FNAIM annual report, prices of resale property have risen by a healthy 3.8% in 2007. While the exchange rate between sterling and the euro has not moved in favor of sterling based clients, the Euribor interest rates, on which the cost of French mortgages are based, are starting to fall. For example, in the first 3 weeks of the 2008, the 12 month Euribor dropped from 4.73% to 4.31%, a difference of 0.42%.

For switched on UK based clients this creates an interesting opportunity. If you were thinking of purchasing a property in France and looking at completing your purchase in cash, it may make more sense to take out a French mortgage instead. Even if taking out a mortgage is not an avenue that you would normally have considered, it could be a good way of minimising the amount of sterling that you will need to transfer to France at today’s less advantageous exchange rates in order to purchase your property.

French mortgages are gaining in popularity for clients purchasing a second home in France. While the mortgage market itself is still less developed than the market that UK and Irish clients are used to back home, it is evolving all the time. Improvements in flexibility and the increasing availability of non-resident mortgage services through specialist overseas brokers is making it easier and easier for clients on this side of the channel to take out a French mortgage.

People are waking up to the benefits of keeping their cash in the UK and taking out a Euroloan, for as well as the cashflow benefits , there are also tax implications to having debt secured against your property in France.

Paul and Stephanie McDonald had been thinking about buying a French getaway by the sea for some time, and finally completed on their dream home near Nimes just before Christmas. They had initially been looking to pay for the property in cash, but after considering their options decided that it would be beneficial in the long run to take out a mortgage. Paul says, “although we had the cash to purchase the property, having looked at various possibilities, we decided to take out a French mortgage. Although our French isn’t great at the moment, with the help of a specialist broker the process was surprisingly straightforward, and what’s more, this left us with cash to do some work on the property and treat ourselves to some luxuries that we hadn’t previously budgeted for.”

To give you an example, if you had purchased a €300,000 property in cash last February it would have cost you about £199,000. If you were considering a purchase at the same price in February 2008 you would need to find an extra £27,000 even though the property had not actually increased in value during this period. Mortgages with a loan to value of 80% are widely available in France. By completing your purchase with a French mortgage you will only realise the ‘loss’ from the weakening sterling versus Euro exchange rate on the 20% of the purchase price, potentially ‘saving’ you around £21,000 on the initial sterling cost of your property.

It is important to highlight here that any savings are dependent on future exchange rate movements, which can obviously work either for or against you over the long term.

If you would prefer not to have a mortgage on your French property in the long term, you should look to take out a flexible product with no redemption penalties. This will give you the flexibility to pay off the mortgage at a later date, potentially when exchange rates have moved back in your favour.

The majority of French mortgage products are available without redemption penalties – with the exception of long term fixed rate deals. A good French mortgage broker will be able to select the most suitable option for you, and also talk you through the best offers currently available on the market to make this as simple as possible.

There are many products available with no early redemption penalties, and although these are generally on a variable rate, it is possible to fix rates for up to a year without incurring any penalties on repayment of the loan. If you are looking to keep the mortgage for a longer term, you can fix a rate considerably below the Euribor rate at 4.15%, while the 3 month Euribor is 4.41%. Although these do have some early redemption penalties they are only for a limited time.

It is also worthwhile consulting a tax specialist who will be able to guide you through the tax implications, both positive and negative, of having a mortgage secured against your French property, in addition to the timing of taking out the finance and the effect this will have on your tax liabilities.

For an idea of current rates available click here.

If you do take out a French mortgage you will of course be required to make your monthly payments in Euros, transferring a lump sum to France tide you over or small sums of money over  on a regular basis. There are many foreign exchange companies that will be able to help with the latter process and set up a regular payment plan for you.  You are still going to be affected by currency fluctuations, but on a much smaller scale.

There are nevertheless some buyers who will wish to release equity from property in the UK in order to purchase their property abroad. Depending on the arrangement fee in the UK, they may have lower costs on completion, and for clients looking to benefit from the flexibility of a self-cert mortgage this is still the only option available.

For clients who have completed a purchase in cash when exchange rates were considerably higher, there is still the option of taking advantage of a French mortgage. There are products on the market that have been specifically designed for clients to arrange a French mortgage on their property up to 12 months after they have completed a cash purchase, at the same beneficial rates as available at the time of purchase. After this time however, it may be costly to take out a mortgage on a property that you already own, as although equity release products are now available, there is limited choice, and rates are typically higher than for mortgages taken out at the time of purchase.

Every prospective French buyer is different, and there is no one solution to suit all. However, if a French mortgage was an option that you hadn’t considered, it may be worthwhile giving it some thought.

If nothing else, carrying out some research into the market and understanding the options available will put you in a strong position when it comes to making your final decision between a cash, or mortgage based purchase.

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