The money column - Fiona Watts explains how mortgages work differently in France
1 Aug 2021
1 Aug 2021
This article, written by our Managing Director Fiona Watts, first appeared in the July 2021 issue of French Property News.
Fiona Watts explains how mortgages work differently in France, largely in the best interest of buyers.
While the terms used to describe French mortgages seem very familiar to anyone used to borrowing in the UK, it is important to note that there are several key differences in how a French mortgage and the products on offer to a non-resident work in practice. And since it is extremely difficult to re-mortgage in France, there’s an added pressure to ensure you select the best product for you now and in the future, at the point of purchase. Here’s a handy guide to the different French Mortgage products on offer to anyone looking to purchase from abroad.
Repayment vs Interest only
Just like in the UK, French mortgages are offered on both a capital repayment (where you pay both the interest and a portion of the original loan amount back each month, so at the end of the term the debt is cleared) and interest-only basis (where you only pay the interest on the loan, and at the end of the term you still need to repay the original loan amount). Most non-resident mortgages are offered on a capital repayment basis. Interest-only ones are offered to non-residents by a very small number of lenders, and borrowers need to satisfy more stringent affordability criteria around the level of existing debt and the value of liquid assets to obtain them.
If you are considering an interest only product, be aware that the maximum term is typically 14 years, and that it is not possible to re-finance your property at the end of the term so the loan will need to be paid off in full at that time. Moreover, the loan-to-value (LTV) is also lower on interest-only products: 75% compared to 85% on a capital repayment product. Despite this, interest-only products remain popular as the monthly payments are significantly lower, and over the past few years French lenders have also introduced a few hybrid products. These allow you to either have the first few years on interest-only before ‘converting’ to a repayment product (useful if you know your monthly outgoings will reduce in a few years, e.g. no more school fees) or putting half your loan amount on interest-only and half on repayment.
Fixed vs Variable
Again, as in the UK, there are fixed, variable and capped French mortgage rates. But the similarities really end with the names. In the UK it is typical to get a fixed rate for two to five years, but much rarer to get a rate that would be fixed for any longer. Once the fixed rate period expires, in the UK you would automatically be moved onto the standard variable rate of the lender, but in practice you would refinance the loan onto a different product for more preferential rate (usually paying a hefty bank arrangement fee each time for the privilege). In France you can fix for up to 25 years! As rates are very low at the moment (around 2%) a fixed rate can be a very attractive proposition, giving the borrower piece of mind that the euro monthly payments would remain the same for the lifetime of the loan. Variable rates in France usually track the Euribor, and (as the Euribor is currently a negative number) are also very low.
However, if the Euribor goes up, your mortgage interest rate will also increase. But if it decreases then you will see the benefit in a lower interest rate. When this happens in the UK, the amount you pay for your mortgage each month will fluctuate, which can be unsettling for some. However, in France, when the rate changes, rather than change the amount you will pay each month, the lenders will instead adjust the term of the mortgage. They believe borrowers would prefer the certainty of knowing that the monthly payment will not change over time and so instead will increase or decrease the total number of monthly payments you will need to make.
Another ‘safety feature’ that is more common in France is a capped product – it’s a variable rate product that for a certain number of years (or in some cases the full term) will have a limit (or cap) on how much the rate can increase, regardless of what happens to the Euribor. The cap is typically 1% or 2% above the initial rate.
Early repayment charges
Another key difference between how French and UK mortgage products work is around the use and severity of early redemption charges (ERCs - an additional charge levied by the bank should you wish to pay back some or all of the mortgage early). In the UK, ERCs are attached to almost every mortgage product, and are often very high (typically between 3-5% of the total loan amount). In France, by contrast, many variable and capped products do not have any ERCs and those attached to a fixed rate product would only be around six months’ worth of interest on the amount you were redeeming. Based on a 250,000 loan it would cost 12,500 to pay that back early in the UK, but only 2,500 in France!
This gives borrowers on the Continent a lot more flexibility to make over payments or pay back the total mortgage early without incurring huge costs. It can be particularly beneficial for those purchasers who chose to take out a French mortgage to reduce the amount of sterling they would need to convert into Euros at the point of purchase. If the exchange rate becomes more favourable, they can then repay the mortgage early – in effect reducing the overall sterling cost of the French property.
As alluded to above, the re-finance and equity release market in France is essentially non-existent. If you have purchased your French property in cash, it will be very difficult to obtain a mortgage on it at a later date and extract the equity you have in the house unless you sell it. French banks will only allow you to change products or lenders or increase the loan amount (release equity) in a very limited set of circumstances (usually only if you are looking to purchase another property in France or the UK). It is also a very expensive transaction as you are required to engage a notaire and pay all those legal fees again. In practice this means the rate you are moving onto needs to be at least three percentage points lower than your current rate for you to obtain any financial benefit over the term of the loan. It is very important therefore that you assess your current and likely future financial circumstances at the point of purchase to ensure that you do choose the most suitable product for you. We would very strongly advise that you take financial advice from an FCA and a specialist French mortgage broker qualified by ORIAS (French regulatory body) before committing to any product. They will also have the benefit of having access to exclusive rates and discounts on bank arrangement fees due to the volume of business they do with the banks.
Finally, it is also imperative that you get a clear explanation as to what other conditions are attached to the mortgage product. In the UK it is no longer common to be required by the lender to purchase any other of their financial products in order to access the mortgage. However, this is not the case in France. The majority of banks will require to you open a French bank account with the lender, purchase a life insurance policy from their approved provider (which is always more expensive than a UK policy). Regardless of the level of cover you already have, they will usually require you to keep an (often sizeable) euro deposit in the bank’s savings vehicle and lodge funds to be managed by the bank. A general rule of thumb is the lower the rate (especially any that are less than 2%), the more likely there will be ‘strings’ attached. In practice, these additional products can add up to 1.5% to the headline mortgage rate, so do be aware that the lowest rate may not, in fact, be the cheapest deal.
There really are a myriad of benefits to purchasing with a French mortgage, to not lock up your cash savings in a property and investing them into a higher return investment vehicle instead, increasing your total purchase budget or reducing the level of sterling you need to exchange into euros at an unfavourable exchange rate. And there are some genuinely great deals on the market.
Fiona Watts is the co-founder and Managing Director of International Private Finance Tel: 0207 484 4600 internationalprivatefinance.com
1 Aug 2021
1 Aug 2021