Are you mad to purchase a French home in 2020?

“Am I crazy to be buying in France now?” We’ve had a few clients question whether purchasing abroad in this unsettling time is the sensible thing to do. Periods of economic and social instability can make these big decisions feel riskier. Yet, we have had our busiest July and August since the referendum and many immobiliers are reporting the same. Whether it’s the December Brexit deadline, the ability to be able to ‘work from anywhere’ or a desire to have a place to escape to, the demand to purchase in France is showing no sign of abating. Are all these potential buyers mad?

The answer is a resounding no! The benefits of owning a home in France have multiplied as we continue to experience the impact of a global pandemic on our personal and social lives. Buying in France allows you a place to escape to without the need to get on an airplane. (If you fill up the tank before boarding the Eurotunnel you don’t have to leave your car until you arrive at your own front door!). There’s no need to worry about the cleanliness, or who has been staying in it before you. With a good broadband signal you can enjoy your place for much longer periods of time – no longer constrained to just holidays. And, whilst a lockdown may restrict access for a while, the domestic French tourist market exploded in 2020, so you would always have the option to rent it out.

A French mortgage keeps your cash savings liquid

In times of economic instability purchasing with a French mortgage will give you far greater protection against an uncertain future; be that by mitigating the exchange rate fluctuations, having the security of a fixed rate for the lifetime of the loan (French mortgage rates are still at near-historic lows and you can get a fixed rate for around 2% for 20 years!) or even a product that allows you to have the first few years on an interest-only basis to keep the initial costs low. But most importantly, purchasing with a French mortgage at up to 85% LTV keeps your cash savings liquid – ready for that rainy day or unexpected event. Releasing equity after you've bought your French home is not possible on the Continent, so as a cash buyer you would be locking up those savings until you can sell.

Another gauge as to whether now is a good time to buy in France is that the French banks – always a cautious lot when it comes to non-resident buyers - are still lending. No bank has pulled out of the market (unlike what we saw after the 2008 crash, and in some cases, after the 2016 referendum) and whilst some have made some changes to their eligibility criteria, all the lenders have said that these changes are under regular review and unlikely to be permanent. Which is another indication that they remain very optimistic about the future of non-resident lending.

The changed criteria have made it, for some people, harder to obtain a French mortgage – frustrating for those that are affected but reassuring for those that remain eligible as it indicates that you are not overstretching yourself now, nor in the future.

Let’s take a closer look at these changes and what impact they have had in practice:

French Mortgage Eligibility – can I qualify?

  • Currently, anyone working in hospitality and leisure and the aviation industries, is going to struggle to obtain a French mortgage. This is regardless of whether you’ve been furloughed or not. The French banks are just too nervous about the short-term future of these industries and the potential ongoing disruption they may face.
  • The savings buffer that the French banks require you to have once you have purchased the property has been increased from 12 to 24 months. This means you need 2 years’ worth of the French mortgage monthly payments in cash, ISA’s, shares, or a pension pot you can draw from with relatively short notice. This is to ensure that you are protected in case of an unexpected drop in income.
  • At the height of the pandemic, the French lenders stopped taking bonuses into account when calculating a borrower’s eligibility. They have since reviewed this and are now taking 50% of the average earned over the past 3 years.
  • Perhaps the most ‘subjective’ change is that concerning the self-employed (which includes anyone who owns more than 15% of shares of a limited company). The French banks will require you to produce a COVID-impact statement that details what effect the pandemic has had on the business and its future. This does not mean that if your business was impacted, that you will not be able to apply – the banks are realistic and looking more to see that you were able to comfortably weather the storm and that you and the business were able to continue to meet all your contractual obligations (e.g. the business didn’t miss any payments, you didn’t take mortgage payment holiday). They will also look at the level of shareholder funds and will request an up-to-date balance sheet.

French Property valuations

The area where we see the most confusion, is regarding the loan-to-value that is now available to non-residents. Most banks will loan up to 80% against the net purchase price (not including the estate agent’s fees) but there are a few that will go up to 85% of the gross price. It is still possible to get a loan of 85% LTV but based on the bank’s valuation of the property, not the purchase price. Historically the valuation and the purchase price were rarely at odds, yet now we are seeing a few properties, typically those below €600k, receiving a lower-than-expected valuation. For these properties, the banks carry out a desktop valuation whereby they consider several factors including the age, location and size of the property and using a matrix (based on the official property sales prices issued by the Office of French Notaires for 2019) calculate what the price per square metre should be. They are currently reducing this figure by 10% regardless of where the property is located because they believe that property prices may fall by 5-10% in the next year or so. [Update 10/12/2020: this 10% reduction is no longer automatic and some banks have now got rid of this altogether as they are no longer predicting a fall in property prices in 2021]. The impact of this is that some properties (often located in popular second-home areas that are unlikely to suffer a fall in house prices) are understandably still being sold at prices that have not considered this 5-10% fall and borrowers are therefore being offered loan amounts lower than what they had applied for.

For example:

You have agreed to a purchase price of €300k and have applied for a mortgage at 85% LTV – a loan of €255k. The bank conducts a desktop valuation and also value it at €300k, but then apply the 10% reduction, reducing the valuation to €270k. The bank offers the mortgage at 85% of that valuation which is a loan of €229,500 – which requires you to find an additional €25,500 in cash.

It is fair to say that some borrowers, mostly those who signed the compromis de vente (pre-sale contract) prior to the pandemic, are finding they can’t borrow as much as they had hoped. However, we aren’t seeing this being such an issue for our clients that are negotiating prices now, and for those buying over €600k, where typically the bank would conduct an on-site valuation, we are yet to see any valuations coming in lower than expected.

So, are you mad for purchasing in France now? No, absolutely not! France is still, if not more, attractive as ever to have a place of your own. There are a few more checks in place to ensure you are not over-stretching yourself (so please do contact us to ensure that your French mortgage application is given the best chance of success and the French mortgage product you choose is the most suitable for you now and for the future) but this should only reassure you that now is a good time to realise your dream of owning in France.

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30 Sep 2020

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