Property Purchase Process | Property Purchase Costs | Mortgage Finance

Introduction:

When buying property in France, you can either get in contact with mortgage lenders directly or go through a financial adviser or mortgage broker. Before you commit to a mortgage, it is important you are clear about how you will repay the loan, the repayment period, the interest rate, the type of mortgage you're taking out and whether there are any penalty clauses for early repayment. When arranging a mortgage you should bear in mind what proof of income you will need to show, whether you will need to have a medical and the length of time the mortgage will take to arrange.

Once the lender has approved your application, you will be sent a mortgage offer. Once a mortgage offer is received, French legislation requires that the borrower waits at least 10 days, but no longer than 30, before signing and accepting it. On acceptance, you will have to pay an arrangement fee of 1-2%. Most major institutions are willing to process applications prior to you locating a property to indicate how much they would be prepared to lend to you and on what terms.

As a rule, you should allow two months between the completed mortgage application and the mortgage offer.

Availability:

The French mortgage market is highly competitive and mortgage finance is readily available to French nationals and foreigners alike once certain eligibility conditions have been met (above all, proof of income and collateral). There are two main options for UK investors: either to remortgage your British property via a UK lender or to take out a mortgage against your French property through a French lender (see below for a comparison of the pros and cons of UK and French mortgages for UK investors).

French banks will loan to non-residents and some large French lenders have UK offices. French mortgage lenders go through a very similar procedure to that used in the UK when assessing eligibility. The bank will need to check your financial standing and will require details of residence status, employment, income and tax status. If you are self-employed, you will be asked to show your accounts and tax liabilities. In France, mortgage lenders do not require a survey, although some ask for a property valuation. A French bank usually asks for a life policy to be taken out on the life of the borrower.

With lenders advertising all sorts of attractive rates, you'll need to look at the final rate – the "taux effectif global" or TEG – including insurance and charges. In addition to the major banking organisations loans can be negotiated through savings banks ("caisses d'epargne") and notaires.

For those resident in France , there are a number of schemes to assist purchasers, including the "prêt (loan) a taux 0%", the "prêt a 1%", the "prêt fonctionnaire", CEL and PEL and the "prêt conventione".

Rates of interest:

The French tend to favour fixed interest rate loans (“a taux fixe”), but variable interest rate loans (“a taux variable”) are available, as are loans that include a combination of fixed and variable elements. Normally there are early redemption charges on all loans. Where interest is variable the final rate will generally be 2% higher than the Euroland Interbank Offered Rate (EURIBOR) and for foreign buyers this is usually fixed for 12 months.

One main difference between UK and French variable rates is that, whereas in the UK the monthly payments are likely to fluctuate, in France the rates tend to stay stable and it is only the term of the loan that changes according to the EURIBOR rate change. Rates of interest on French mortgage finance tend to be lower than their UK equivalents which are about 2% higher and are likely to remain so. As a general rule, the larger the deposit, the lower the interest rate.

Loan-to-value:

As a general rule, mortgage repayments, liability for rent and payments on loans outside France should not add up to more than 30% of your gross monthly income. French mortgages can be found for up to 80% loan-to-value (LTV) with 70% the usual figure for non-residents. However, the French mortgage market is rapidly evolving and 90-100% LTV is offered in some cases.

In most cases, the mortgage will not cover the substantial acquisition costs of a property in France. If you take your mortgage out in the UK you will generally be able to borrow more than you would in France. French lenders do not usually take into consideration potential rental income when assessing the loan. The balance of the purchase price not covered by the loan will form the deposit.

Repayment periods:

Local French institutions favour shorter loan terms, whereas British lending institutions are more prepared to grant longer repayment terms. A wide range of mortgage products are available in France but repayment mortgages are the most common.

A comparison of sterling and euro mortgages for UK investors:

British investors can either remortgage their UK property via a UK lender or take out a mortgage on their French property via a French lender. If they remortgage in the UK, their mortgage will be in sterling, but if they raise finance in France, their mortgage will be in euros.

• The argument for euro mortgages:

  The main advantage of taking out a euro mortgage via a French lender is that interest rates have tended to be lower than in the UK . This is because euro mortgages are tied to the base rate set by the European Central Bank (ECB), which has to date has always been lower than that set by the Bank of England . Euro mortgages are a particularly attractive for owners who receive an income in euros (for example, rental income) which covers their French mortgage payments, thereby avoiding the cost of transfering sterling to a French bank account. In this instance, by having your mortgage in euros you will avoid currency transaction costs and the risk of exchange rate fluctuations.  If you are intending to let your French property, you will almost certainly not be able to set off the mortgage interest on a UK loan against the rent received for French income tax purposes.

• The argument for sterling mortgages:

  However, if owners do not have an income in euros which covers their mortgage payments, then they will still have to transfer sterling into euros and therefore be at the mercy of exchange rate fluctuations. In this instance, if sterling fell against the euro, monthly mortgage repayments would increase in value. There are also the monthly costs of currency exchange and transfer from sterling to euros to consider as well as the initial costs of setting up a new mortgage in France; once these costs have been factored in, they may cancel out any savings made by the lower euro interest rate. Raising your funds in the UK allows you to avoid having to take out further life insurance (frequently a requirement in France ) and stick with the UK mortgage system you're familiar with. You tend to have more choice of repayment method by taking out a mortgage in the UK: Repayment mortgages (“prets amortissables”) are most commonly offered by French banks to foreign buyers in preference to interest-only mortgages and endowment policies which you can obtain if you refinance in the UK.

You should seek legal advice as to which arrangement best suits your needs.

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