Despite the success of the vaccine rollout and the re-opening of the UK economy, Brexit and the continuing tensions between the UK and EU over the Northern Ireland protocol are hampering the recovery of the British Pound against the Euro. At the time of writing (Aug 2021) it’s currently at £1 GBP = €1.17 EUR. That's €0.02 higher than 6 months ago where it was worth €1.15 but lower than the €1.19 it averaged in Feb 2020. And let’s not think too much about the time prior to the Brexit referendum where the GBP/EUR rate was consistently above £1/€1.30.

Brexit’s impact on the exchange rate

Obviously, the referendum result was a shock to the financial markets and has had a big impact on the sterling value of a French property. Back in January 2016, the euro was at €1.36 and a €500,000 property in France would have cost you £367,647, in May this year it would have been £434,782 - that’s over £67,000 more you would need to find down the back of the sofa! It’s therefore understandable that many people have started to think twice about buying in France or have had to reduce the number of euros they were willing to spend.

However, this is not the case for our savvy clients, who have realised that by taking out a French mortgage at the maximum LTV available, instead of buying in cash, they can mitigate the exchange rate and reduce the sterling cost of their purchase! (And continue to earn money on their savings, rather than locking it into the French property).

This is possible because French mortgages currently have two distinctive features:

  1. French mortgage rates are at near-historic lows, (from around 1.35% fixed for 10 years on a repayment basis, or 2.2% interest only on a variable rate for 14 years)
  2. No, or very low, early repayment charges (ERCs) (typically 6 months’ worth of interest on the balance you are redeeming). IPF can even access fixed rates with no ERCs

By taking out a mortgage you reduce the amount of sterling you need to convert into euros to just the 15% deposit (maximum LTVs available in France are 85%) and the notaires’ fees and borrow the rest on a French mortgage (either on an interest-only or a repayment basis). If/When the exchange rate recovers you can then choose to repay all or some of the mortgage, at this more favourable exchange rate.

Let us explain with an example of purchasing with a French mortgage vs buying in cash:

Mr and Mrs Carlisle wanted to purchase a charming French holiday cottage. Their offer of €500k was accepted in Feb 2020 and they initially prepared to transfer all their sterling savings over to Euros. With an exchange rate of £1/€1.17 the purchase price of their cottage was £427,350. However, during the 3 months it typically takes to complete a French property purchase, the exchange rate moved to £1/€1.11 and the sterling purchase price of their cottage was suddenly increased by over £23k to £450,450. Luckily, they had the money in their savings account, but they weren’t keen on leaving themselves with nothing to fall back on…

So, they investigated taking out a French mortgage. They decided on a fixed rate interest-only product for 7 years at a rate of 2.65% with a maximum LTV of 75% (a loan of €375,000). In total they had to transfer €125,000 (so £112,600) for their deposit and pay €888 each month for the mortgage.

After 2 years, the pound strengthened against the Euro and reached €1.20. At that point, the Carlisles decided to repay the mortgage back in full. They owed the full balance as they had opted for interest-only, so had to pay €375k – but at the new exchange rate this was only £312,500. Therefore, the sterling cost of their French property was £112,600 + £312,500 + 2 years’ worth of mortgage payments (£17,780) and the early repayment charge of £4k which is a total of £459,080. Saving them almost £4k if they had bought it outright in cash. They also had the peace of mind that should anything untoward have happened over those 2 years, they would have had cash savings in the bank to cover it.

Canny investments can make you money, instead of locking it into the French property

Plus, as cautious investors, they had earned an average 4% interest on their savings (remember, by taking out the mortgage, they only needed to withdraw £112,600 from their nest egg of £465k, leaving them £353,200 to invest). Their £353,200 had grown to £382,000 – making them over £28k! So, not only did they save £4k on the purchase price, the mortgage allowed them to make another £28k on their investments – in just 2 years! Bear in mind, that if within 2 years the exchange rate had recovered to pre-referendum levels of £1/€1.30, the Carlisle’s would have saved £41k on the purchase price as well as making the £28k on their investments!

So, don’t let the exchange rate scupper your dream of owning in France.

1 Sep 2020

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