What are the market conditions to obtain a mortgage in France?
1 – Overview of the situation
There has never been a better time to get a mortgage in France. Rates are currently just above their all-time lows, and this is for a number of reasons. The Tec 10 index, which gives a view on how much the French government pays to borrow money over 10 years in France, fell this summer (2019) to its lowest ever level. As a result, French interest rates fell to their lowest ever levels, too.
For 2020, here at French private finance we are able to obtain rates starting at 1.30% fixed over 20 years for non-residents.
2 – What’s happening in the French mortgage market and why is France a good investment destination?
France is one of the largest investment markets in continental Europe. Its stable economy and legal system, added to its history and culture, make France attractive to property investors.
Currently, France can show low interest rates and a rental sector with continual growth, especially in the main cities such as Paris, Lyon and Bordeaux. While this has attracted institutional investors interested in retail and tourism, personal investors looking for investment opportunities or second homes are also prominent.
There is no legal restriction on foreign ownership of French real estate. French law always applies except in succession matters where the law of the non-resident owner’s country applies.
Securing your french mortgage now will give you two major advantages:
A – Offset weaker / unstable currencies (such as Sterling) in anticipation that they will improve against the Euro.
B – Secure a long term and fixed mortgage before the interest rates rise again.
3 – Why are French mortgage rates so low and fixed for so long?
As with many aspects of life, the French do things differently. Nowhere is this more evident than in the lending sector. Unlike british banks, who tend only to offer fixed terms of 10 years or less, French banks offer long term rates that are fixed for the entire term of the mortgage. This means the financial system and property market both benefit from stability and security over the long term.
Both domestic and international buyers can secure low-rate, long-term fixed mortgages over 15-25 years. This means that they know exactly what their mortgage will cost, all the way until the mortgage is paid off. This offers the buyer peace of mind and considerable financial foresight – something equally true for the banks providing these products.
This is one of the reasons why the French property market wasn’t affected in the same way that the UK and Spanish markets were during the downturn. It is also why the country is attractive to investors as a stable destination to place money for long-term growth.
Since the Nineties, when interest rates were last extremely high, the French mortgage market has been based on long-term mortgage deals which offer a degree of protection for the borrower. It is quite common for a French resident to fix their mortgage payments for 20 years and to see that loan through to the end without ever remortgaging. As a result, non-residents are also utilising this great long-term value in French second home mortgages.
4 – What about the variable interest rates, loan-to-value and guarantee?
Continuing with the theme of security, in France, a variable rate mortgage often offers the flexibility to increase the term/duration of the mortgage to bring down payments, with some banks also capping any increase in monthly payments to the rate of inflation.
Only in exceptional cases will French banks allow borrowers to take on a mortgage payment which would increase their total monthly commitments past 33% of gross income. By sticking to this formula, it leaves borrowers with sufficient income to live on, and the fact that mortgages are either capped or fixed means that the banks are confident borrowers will not default.
The stability that this responsible lending brings means that 85% loan-to-value is still achievable from a range of banks for both residents of France and European non-residents, though other lending criteria may apply (such as making loans only available to existing homeowners or those with a certain level of savings, with minimum income criteria also prevalent).
The bank will take a charge (basically a guarantee) on the prospective property – the details of which will be outlined in the loan offer. The loan will generally be what’s known as a recourse loan – meaning that in case of default the bank will take the property as security. In the case of negative equity through a forced sale, there is the possibility that the French bank may pursue the borrower’s assets in their home country. The process of forcing a sale in France can take over two years and is time-consuming and expensive for the lender – this is one of the main reasons the banks are so strict when asking for evidence of income and assets.