Does a French Mortgage Make Sense?
Wednesday 01 August 2012
With interest rates falling in France does it make sense to take out a French mortgage, asks Robert Hunt of International Private Finance?
On both a political and economic level, nobody could say that 2012 has been a dull year for France.
The presidential elections in May, which saw a triumph for the opposition socialist party and their candidate François Hollande, were set against the backdrop of economic turbulence caused by Greece’s sovereign debt crisis and financial unrest throughout the eurozone.
These events have been keenly observed by British and other overseas buyers who are considering a purchase in France, and in particular those who are deliberating how to finance such a purchase.
The first important factor to note is that mortgage rates have fallen steadily since the start of the year.
Furthermore, a recent decision to reduce the benchmark ECB index 0.25% saw the ‘Euribor’ base rates, to which the majority of French mortgages are linked, decrease further.
International buyers in France can already benefit from the resulting reductions in the cost of new mortgages.
One of the main providers of non-resident financing in France has already shaved 0.20% off the starting rates of its variable mortgage facilities, while other lenders have indicated they too will follow suit.
Accordingly, twenty-year fixed French mortgage rates are now under 4% for the first time for over a year.
While interest rates have certainly moved in the borrower’s favour, the same cannot be said of lending criteria in general. Banks are increasingly cautious about their distribution of credit. In addition to their traditional ‘debt burden’ calculations, French lenders are now employing new affordability criteria relating to both the income multiples and monthly residual income of their applicants.
The loan-to-value (LTV) ratios available to international buyers have also been adversely affected. Although 85% LTV mortgages are still on the market, certain banks have dropped their own maximum levels from 80% to 75%.
However, alongside the issue of deposit levels it is important to also consider exchange rate movements. For British buyers, things are at last beginning to look more positive on this front. Since the start of the year the pound has continued to strengthen steadily against the euro, something which obviously has a significant impact on the buying power of those whose savings are denominated in sterling.
On a more political level, President Hollande has announced his intention to increase taxes, targeting wealthy individuals and non-resident second home owners of French property. The British press have been particularly quick to highlight the rising costs associated with investing in France, and this has inevitably discouraged potential French property buyers based internationally. However, there remains considerable doubt about the legality of the proposal to more heavily tax holiday home rents and capital gains, which seems contrary to EU legislation and which may yet be abandoned.
What is less widely reported are the potential tax-related advantages that a French mortgage can offer. For example, it is still possible to use a mortgage to reduce the property’s net value and mitigate the wealth tax payable. If you are renting out your second home, it is also possible to offset the interest on the mortgage against the rental income. Your taxable base thereby decreases, reducing the level of taxes and social charges you will be liable to pay.
The French mortgage market is in a constant state of unrest, so if you are considering a French purchase it pays to ensure you take appropriate advice at an early date.
At IPF, we are able to analyse your personal requirements in accordance with current mortgage availability, with a view to ensuring that you obtain the most suitable and cost-effective financing for your new purchase.
For more information, please visit International Private Finance or call +44 (0)207 484 4645.
This article was featured in our Newsletter dated 01/08/2012