2. French Mortgage or Remortgage ?

1. 2.1. Currency Risk
   2.2. Mortgage Tax Relief
   2.3. Level of Interest Rates

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2.2. Tax Relief on French Mortgages

Even if you are able to buy your French idyll on a cash basis, you should consider whether it might be in your interest to take out a mortgage on the property.

The cost of capital has historically been lower in France than in the UK, and it may be in your interests for reasons of taxation to retain a loan against the property.

If the property is constructed to a strict low energy standard (Bâtiments Basse Consommation (BBC)), then the relief is granted at the rate of 40% for a full seven years.

The amount of relief is capped at €1500 per person in the first year, and €750 for the remaining four years, subject to a total maximum relief of €3750 for a single, widowed or divorced person, and €7500 for a couple. These amounts are doubled where at least one member of the household is registered disabled. They are also increased each year by €500 for each dependant person in the household.

Thus, a couple with no children are entitled to maximum tax relief of €3000 in year 1, with a cap of €7500 tax relief over five years.

With effect from 2010 the rules for a newly constructed property are less generous, as the government has decided that over time mortgage tax relief should only be payable on such properties if they meet the low energy consumption standard. The rules on existing properties remain unchanged.

Accordingly in 2010, for those new properties that do not meet the BBC standard, the relief of 40% in the first year and 20% in the four subsequent years will reduce to 30% and 10% respectively; in 2011 the relief will fall to 25% and 10%; from 2012 it will fall to 15% and 5%.

From 2013 a new property will need to meet the BBC standard in order to obtain the relief of 40%, and from this date only new mortgages granted on properties that are energy positive (BPOS) will be entitled to 40% relief over seven years. A BBC property would only be entitled to 40% in the first year, and 20% for each of the subsequent four years.

Properties constructed to the BBC standard are required to achieve an average energy consumption no higher than 50 kWh/m² per year, although this figure does vary by region and altitude.

Strictly speaking, at the time of purchase the property must comply with the basic standards of habitation, so you may well not be able to benefit if you are buying a ruin for complete renovation.

The interest relief applies as much to self-build properties as those purchased from an existing owner.

You do not need to use a French lender to obtain access to the tax break, as the use of a lender based anywhere within the EU is equally valid. Conversely, you will need to be resident in France, or buying with a view to becoming resident.

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.

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.

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