2. French Mortgage or Second Mortgage?
If you are proposing to use mortgage funds to buy your property in France, you will either need to take out a second mortgage on your existing home, or take out a mortgage on the French property.
In making this choice, there are four main factors you need to consider:
- Currency Risk
- Mortgage Tax Relief
- Level of Interest Rates
- Security of Main Home
2.1. Currency Exchange Risk on French Mortgages
The level of currency risk to which you will be exposed will differ as between re mortgaging your existing home and a mortgage on the French property.
2.1.1. Remortgage
If you are able to take out a second mortgage on your existing home then the whole process is certainly more straightforward, and you are offered a higher degree of protection against currency fluctuation.
If you live outside the Eurozone then your main currency risk with re mortgaging is at the time you purchase the property, something you can insure against by organising a forward contract at a fixed rate.
If you think your currency is going to strengthen against the euro then you would be better off getting a spot rate, and then transfer the funds in time for completion.
Once purchased, with re-mortgaging you have the same monthly payment, irrespective of changes in currency rates.
Only if and when you decide to sell the property does currency risk later become an issue. Of course, it could be a big issue if you do decide to sell, and the currency has gone against you.
When you getting around to buying euros, consider using a currency broker. Some of their services are free of charge, and their rates are invariably better than those of the main banks.
2.1.2. French Mortgage
If you are unable to re mortgage the full price of the property, you either have to fund the balance from cash resources, or secure a Euro French mortgage on the new property.
If you take a euro mortgage, and your revenues are not euro based, you take an ongoing risk with the currency.
One partial solution is, once again, to buy a forward contract, which you can do so for at least two years ahead, with renewal on a periodic basis.
Thus, not only could you secure the mortgage at a fixed rate, but you could continue to transfer funds across to France at the same fixed rate until the expiry of the forward contract.
If you do so, make sure you use an established bank, or a currency exchange dealer authorised (not merely registered) with the Financial Services Authority.
One other solution is to borrow more than you actually need and maintain funds in a French bank savings account, which could later be used to make mortgage payments in the event of an adverse movement against your home currency.
Thus, even though you many only need to borrow 50% of the purchase price, instead you borrow up to, say, 80% of the value of the property. From your own savings, you then make a substantial deposit into your French bank account, and hold the money there for a rainy day, or make ongoing mortgage payments from the account.
2.2. Tax Relief on French Mortgages
Since January 2011 mortgage tax relief in France has been abolished, although existing recipients are unaffected.
Nevertheless, loan interest on a property is (French) tax deductible against rental income.
Accordingly, if you purchased a property in France with a view to renting it out you are able to charge mortgage interest costs against rental income.
If you are from the UK, this advantage only applies if you are resident in France, as the UK authorities do not allow mortgage interest against liability to UK income tax on rental income.
Debt on a property is also deductible against liability to French inheritance tax.
Whether you are resident or non-resident, if you are likely to face inheritance tax liability, then a mortgage could be used to reduce your tax exposure.
However, French lenders normally require that you take out life insurance to cover the repayment of the mortgage in the event of your death, so this will only be a viable option for those able to find a lender who does not impose this condition.
2.3. Mortgage Interest Rates in France
The level of interest rates in France has historically been well below rates in the UK.
The significance of this difference should not be underestimated.
On a loan of €100,000, with an interest rate gap of 2%, you might expect to pay around £1000-€1500 a year less with a French mortgage.
Over 20 years, therefore, you are going to be paying a lot more in interest payments through re-mortgaging than would be the case if you took out a mortgage on your French property.
On the downside, you need to weigh this saving with the greater currency risk that you face. There is no magic solution.
There are a number of good sites with access to the rates offered by French lenders and with on-line calculators which simulate loan costs and repayments, giving you general idea of what is available.
Probably the best one available for comparing different offers can be found (in French) at Mortgage Interest Rates.
Be careful of headline rates, as you are likely to find there are strict terms governing eligibility.
Most mortgages in France are granted on a fixed rate basis. You can read more about the choice between a fixed or variable mortgage.
UK mortgage lenders are unwilling to lend against a French property due to difficulties obtaining security against the loan, so you will need to use a French lender.
2.4. Security of Main Home
If you re-mortgage your main home to buy abroad then, of course, if you get into financial difficulties with repayments you risk losing your main home.
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