The money column - common misconceptions about French Mortgages
1 May 2021
1 May 2021
This article, written by our Managing Director Fiona Watts, first appeared in the March 2021 issue of French Property News.
Fiona Watts shares some of the common misconceptions about French mortgages
Buying a second home in France is exciting and often the culmination of years of research and dreaming. However, in our experience, we find that buyers don’t spend that much time thinking about the practicalities of financing their purchase. Whether they are planning to buy in cash or with a mortgage, they often assume the rules and norms that apply in the UK will be the same over on the Continent. Yet, even though many aspects of the purchase and borrowing systems are similar, there are quite a few significant differences that can surprise people in both good, and sometimes in disastrous, ways. Here are some common misconceptions we hear on a daily basis and top tips to make sure you don’t get caught out.
I can release equity later
Many people reason that they can afford to buy in cash, so they'll do that and just release some equity from the French property further down the line if necessary. However, only under a very limited set of circumstances (it’s almost impossible unless you want the money to fund another property purchase in France or the UK) are you able to release equity from an unencumbered property in France.
So, if you purchase in cash, your money is locked up until you sell that property. If you purchase with a French mortgage, on the other hand, -rates start at around 1.5-2%, with loan-to-values (LTV) up to 85% - you can reinvest that cash in an investment vehicle that can earn you upwards of 7% per annum and be accessible in the case of a rainy day!
I should use my UK bank
Some buyers reason that they have a great relationship with their UK bank, so they will get a mortgage with them. But no UK retail bank will give you a mortgage with the loan secured on the French property. Your only option would be to release equity on any UK assets and then buy in cash.
Those UK equity release rates are unlikely to be better than the French mortgage ones, and (as explained above) if you buy in cash you lock up that money. Moreover, with the unfavourable GBP/EUR exchange rate, it is much more financially savvy to minimise the amount of sterling you need to exchange – another reason to borrow (up to 85% of the purchase price) with a French bank in euros.
Note that having an existing bank account with a French bank does not guarantee that they will lend to you – only a limited set of French banks are willing to lend to non-residents, and the mortgage application is managed by separate departments who don’t take loyalty to the bank into consideration.
I'm retired so I can't borrow
Some customers believe that as they are nearing retirement or just retired, they won't be able to borrow the money. Unlike in the UK, however, the French banks will take retirement income into consideration and it is therefore possible to get a French mortgage whilst drawing a pension.
Depending on your age the term of the mortgage may well be shorter as the French banks like to see any debt paid off by 75–80 years old. A shorter term (and the often-prohibitive cost of life insurance that is mandatory with some banks) can make it trickier to pass the banks affordability criteria, but it is certainly not impossible, and we assist many retirees borrow money to purchase their French property.
Any bank will lend to me
If you earn in a year, say, five times the loan you need, you might think that any bank will lend to you. What you might not realise is the French banks don’t use an income multiplier to assess your affordability.
Instead, they use a debt-to-income ratio (DTIR) whereby no more than 33% of your income can be taken up by contractual debt payments. That includes any credit card balances (even if they are interest-free), as well as car loans, personal loans, and your existing mortgage plus the mortgage you are applying for. They will also want to see that you have enough residual income left over every month after your debt payments have been paid. Your income is obviously important (and if you are self-employed this means the amount you have withdrawn from your business in the form of salary and dividends – retained profits will not be considered), but it’s more about how much of it you spend and how much is left over at the end of every month. Because of this French banks are very forensic in their examination of your financial situation and will expect you to disclose all your assets, liabilities and income streams, regardless of whether or not you can qualify for a mortgage without including some of them.
I need a buy-to-let mortgage
Some British buyers think that, because they want to rent out their property, they need a buy to let (BTL) mortgage. But BTL mortgages don’t exist for non-residents - and that’s actually good news.
In the UK BTL mortgage have higher interest rates, whereas in France a residential mortgage doesn’t have any rental restrictions so you can obtain a mortgage at the same rate and loan-to-value (LTV) as someone who isn't intending to rent it out. However, the flipside is that you cannot then use the potential future rental income in the bank’s affordability calculations – you need to be able to afford the mortgage without the income from any seasonal lets.
Also bear in mind if they think you will be running the property as a business and giving up your day job in the process (they are always nervous of properties with gites, and anything with a fishing lake or campsite are a no-no), they will not lend to you as they will view that as a commercial venture, rather than a residential one.
I don't have time to apply
Clients have told us that they had assumed they wouldn't have time to apply for a mortgage because their seller wanted them to complete quickly. If managed correctly though, by an experienced broker, a French mortgage application will not delay any purchase. This is because the time taken to apply and get the offer issued can be shorter then the time it takes the notaires to do their due diligence and diagnostic checks.
If you apply directly to a bank they will insist that you have already signed the compromis de vente before they will accept your application. However, to speed up the process you can (and we would always advise you to) speak to a broker and start the mortgage application process with them prior to signing the compromis as banks will accept files from brokers. We work with our clients all the way up to completion and liaise with all the third parties to ensure the transaction goes through – so over 80% of our clients actually complete before the date in their sales contract! Your other option is that you buy in cash and then apply (within 12 months from the completion date) for a post-finance French mortgage.
I'll get stung if I pay off early
Some buyers are wary about getting locked into a rate with high early repayment penalties. The cost of refinancing in France is very prohibitive and due to the number of years of low French mortgage rates there is rarely any financial benefit in doing so. That is one of the key differences with the UK. In France, not only can you fix your rate (currently just above 2%) for 15–25 years (therefore avoiding the admin and fees of re-mortgage every few years), but the early repayment charges (ERCs) are extremely low when compared to the UK equivalent.
For example, if you take out a €250,000 mortgage for 15 years at a fixed rate of 2.25% and then want to pay off €100,000, the ERC will be the equivalent of just six months interest on the amount you redeem (so in this case just €1,125).
Agreement in principle is a 'yes'
Sadly, you can't be sure that you'll get a mortgage approved just because you have an agreement in principle. Unless you have submitted paperwork to a bank which has been analysed by an underwriter and you have received a full approval in principle, this agreement is not worth the paper it is printed on. Rather this is just an illustration of what the bank could lend to you if, once your paperwork is submitted, it satisfies the underwriter. We’ve lost count of how many purchasers have, after approaching a bank directly, signed a compromis on the assumption they can borrow and then, after waiting three months for the bank to process their application, had their application turned down.
I should keep my partner out of it
Some buyers don't put their partners name on the mortgage as they have a bad credit rating. Buying and borrowing in your sole name is fine however, you will still have to submit your partner’s financial records.
The French banks work on the assumption that if you had to make a choice your priority would be to support your partner rather than pay the French mortgage. That doesn’t mean that if your partner does have a bad credit rating that you can’t get a mortgage, but we would strongly advise you seek help from a broker who can advise how best to proceed.
I'll release equity from my UK home
The strategy of some buyers is to release equity from their UK home to pay for the deposit and then borrow the rest with a French bank.
The maximum LTV for a non-resident French mortgage (without the need to maintain a cash balance with the lender) is 85%. So to purchase your property you will need to pay15% of the purchase price in cash plus the notaire's fees (which can’t be added to the loan and are around 7% of the purchase price for an existing property and 3.5% if you are buying off-plan). That personal contribution cannot come from any form of gift or loan, nor by increasing a debt elsewhere.
In France you need to show that you have demonstrated a ‘capacity to save’. It’s very different from the UK, where the “Bank of Mum and Dad” or releasing equity from a property you own is considered an acceptable source of funds.
The benefits of purchasing with a French mortgage are more pertinent than ever during times of economic uncertainty – it can mitigate the exchange rate, and ensure your savings remain liquid for the future. Yet borrowing in a different currency to your income, whilst negotiating the language barriers and potential miscommunications, can be a daunting. If you are thinking of purchasing in France this year, please do speak to an experienced, FCA-regulated French mortgage broker to ensure that you are getting the best advice for your particular situation.
Fiona Watts is the co-founder and Managing Director of International Private Finance Tel: 0207 484 4600 internationalprivatefinance.com
1 May 2021
1 Aug 2021