Purchase with a French mortgage: Don't let a fall in the pound ruin your dream of buying in France
13 Aug 2018
13 Aug 2018
The recent Bank of England interest rate rise and the subsequent comments around the increased likelihood of a ‘no deal’ Brexit caused a sharp drop in the pound as it tumbled to a low of €1.1208. This immediately added an extra 0.34% onto the bill for the 5+ millions of Brits holidaying in France this summer. So, your demi-pression by 3 pence. Not a too heavy price to pay, in return for a glorious couple of weeks enjoying all that France has to offer. But If you were thinking of buying in France a fluctuating exchange rate is a much larger issue. Looking at the average rate per month over the last 12 months, the purchase price in pounds of a €300,000 French cottage in Dordogne has varied from £261,888 (based on a £1/€1.145 in April 2018) to £267,134 (£1/€1.123 on 5th August 2018). That’s an increase of £5,246. Then you’ve also got the relative increases in notaires fees (typically these are 7% of the purchase price). With this uncertainty, it’s understandable that many of you might be thinking of putting your purchase decision on hold. However, how long are you prepared to wait? Who knows what the exchange rate is going to be next month, next year, in five years – are you really prepared to give up on your dream?
Luckily you don’t have to be able to predict the future to buy in France – there is a way you can mitigate the effects of a fluctuating exchange rate, and even reduce the relative cost of purchasing: buying with a French mortgage (a mortgage in euros arranged with a French bank).
The Sterling cost of purchasing a property in France is only fixed when you transfer your currency from your home currency into the Euro. Part financing your purchase with Euros by taking out a Euro mortgage will allow you to delay this transfer until markets and the exchange rate has recovered in your favour, whilst leaving your sterling savings and investments earning interest and growing in value.
Let us explain with an example:
Mr and Mrs McMillan wanted to purchase an appartment in Annecy. Their offer of €400k was accepted and they prepared to transfer all their sterling savings over to Euros. With an exchange rate of £1/€1.12 the purchase price of their cottage was £357,143. However, overnight the exchange rate moved to £1/€1.08 and the sterling purchase price of their appartment was suddenly increased by £13,227 to £370,370. So, they investigated taking out a French mortgage. They decided on a fixed rate interest-only product for 7 years at a rate of 2.75% with a maximum LTV of 75% (a loan of €300,000). In total they had to transfer €100,000 or £92.5k for their personal contribution and pay €688 each month for the mortgage. After 3 years, the pound strengthened against the Euro and reached 1.18. At that point the McMillan’s decided to repay the mortgage back in full. They owed the full balance as they had opted for interest-only, so had to pay €300k – but at the new exchange rate this was only £222,222. Plus, as cautious investors, they had earned an average 4% interest on their savings so this more than offset the mortgage payments. Even when considering the 3 years of mortgage payments and the Early Repayment Charges (which, in France are either non-existant or very low (typically 6 months worth of interest)), the McMillan’s have saved £31k by taking out the mortgage. That’s the equivalent of putting in a swimming pool or revamping the kitchen.
The secondary benefit of buying with a French mortgage is that you don’t lock your savings into your French home. Unlike the UK it is impossible to release equity on a French property if you already own it outright (i.e. you don’t buy it with a mortgage). Once you have bought it in cash, you will only be able to get money out of it by selling the house. Therefore, you need to be very certain that you will not need all or some of that money in the future (for university fees, children’s weddings etc) before buying without a French mortgage.
Buying overseas is unlikely to be done on a whim, and it can be easy to put it off when we enter a period of political or economic uncertainty. However, whilst no-one has a crystal ball, purchasing in France does not need to be a step into the financial unknown. Taking out a French mortgage, specifically with a fixed or capped product can ensure that you are both protected from interest rate rises and hedged against exchange rate fluctuations. So, what are you waiting for? Complete our online form or give us a call on 0207 484 4600 for a personalised French mortgage quote
13 Aug 2018
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