Most of us work hard for a large part of our lives to be able to own our homes mortgage-free, so surely, if you’ve got the cash to buy your French bolt-hole outright, you should? Well, no, not in France. Due to the historically-low interest rates, the near-impossibility of releasing equity in the future and the unique mortgage products available on the Continent, purchasing your house in France with a mortgage is what the more financially-savvy buyers do, even if they could afford it in cash.
Savvy purchasers, regardless of their budget, have realised that borrowing in Euros, rather than buying in cash, has many benefits:
YOU MAKE MONEY WITH A MORTGAGE!
French mortgage rates are still extremely low (between 1 – 2.7% depending on the LTV and term) and importantly, unlike in the UK, they can be fixed for the lifetime of the loan (up to 25 years!). Even a cautious investor can expect between a 4 – 6% annual return on any investments they may have at the moment. Therefore, it’s a case of simple maths – by keeping your cash invested it will earn you around 6%, whilst your mortgage loan will cost you 2% in interest – which still means you are earning a return of at least 4% each year by purchasing with a French mortgage.
- For example, if you bought a property with a purchase price of €500,000 and purchased in cash, at the end of the 15 years you’d be left with a property you own outright worth at least €500,000 (and that’s assuming no increase in value due to the property market). However, if you had purchased with a French mortgage (85% LTV at a fixed rate of 2.5% for 15 years) you would not only own the property outright, but also the €425,000 you invested would now be worth at least €765,400 (based on a 4% return). Yes, you would have paid €85,000 in interest on the mortgage but that still leaves you with a home you own in full and an additional €255,400 you wouldn’t have had otherwise! (And remember these calculations are cautious, as whilst your mortgage payments won’t change as your rate is fixed for the lifetime of the loan, the interest you would earn on your savings will increase if interest rates continue to rise as predicted. For example, if they rise to 7%, or your investments give you a 7% return you would have earned an additional €662,468!)
YOU SAVE TAX WITH A MORTGAGE
French wealth tax kicks in at €1.3M – a benefit of taking out a mortgage on your French property, especially if you are buying for more than €1.3M is that you are only liable for the net value of the property – i.e. you can deduct the loan amount off the property’s value and you only pay tax on the remainder. (This applies equally to non-residents as well as residents). So if you purchase with a French mortgage, you pay less wealth tax.
YOU DON’T LOCK AWAY YOUR SAVINGS
You can only take a mortgage out on a French property up to 12 months post-purchase. After that time it is extremely difficult/nigh on impossible to obtain a mortgage on it to take out the equity if you have bought in cash. (Yes this seems absurd when compared to the UK, but the French banks just don’t view property in the same way as we do). So, if you are worried a French mortgage might delay the purchase/weaken your negotiating position with the vendor you can buy in cash, AND THEN mortgage it immediately after the purchase (and you can start the mortgage process way before that), but you mustn’t leave it any longer than 12 months as then your money will be locked in – and when mortgage rates are so low, why would you risk locking up your money in this way, when you can keep it much more accessible (and earning you a return – see above) so easily?
YOU CAN MATCH THE CURRENCY EXPOSURE OF THE ASSET, by maintaining the liability in the same currency as the property
IT CAN REDUCE THE NON-STERLING PURCHASE PRICE Euro mortgages come with small or no early repayment charges; you pay off the Euro debt only once the exchange rate returns in your favour. This is particularly pertinent if you are purchasing at a time when you feel the pound is historically weak against the euro. By taking out a mortgage (these are available for up to 25 years, so you can play a long game here), you only need to convert your deposit from sterling into euros, rather than the full purchase price amount. Once the pound has strengthened sufficiently you can redeem your mortgage, converting the outstanding balance into euros at a much more favourable rate than at the point of purchase.
SERVICE THE MONTHLY PAYMENTS PURELY THROUGH THE RENTAL INCOME since there are no restrictions to letting out the property on a seasonal basis
INCREASE YOUR ORIGINAL CASH PURCHASE BUDGET, due to high LTVs (up to 85% with no need for AUM, higher if assets can be placed), and extremely low interest rates (from around 1% for non-residents which can be fixed for lifetime of the loan (up to 25 years)*
But won’t it be quicker and easier to purchase without a mortgage?
In France, the purchase process takes between 3-6 months and the timescales are almost completely in the hands of the notaire – they have various checks and procedures that they must carry out on behalf of the estate and how long that takes depends on the individual office you are dealing with. As the most experienced, FCA-regulated French mortgage broker in the market, IPF will be able to arrange a suitable mortgage for you well within those timescales and even speed up the process as we will be liaising with all the third parties (immobiliers, notaires, bank) to bring the sale to completion as quickly as possible (80% of our clients complete their purchase BEFORE the date in their compromis).
We know all the French lenders’ criteria inside out (remember there are only a relatively small number of banks that will lend to non-residents) and will match your requirements to the most appropriate bank and product before making an application so you don’t get 3 months into the process and then get a refusal from the bank (it’s a good tip when choosing a broker to ask them about their approval rates (ours is 97%) and typical approval timeframes (we can get one within a week)). Not everyone will be eligible for a French mortgage but getting a quote from us is straightforward.
A phone call (in English) to discuss your current financial situation will allow us to prepare a personalised quote for you that is tailored to your current circumstances and future plans. And with all the benefits purchasing with a French mortgage affords you, the time spent with IPF will be the most profitable investment you make!