Second home mortgages

Introduction

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.

In France, any variable rate mortgage offers the flexibility to increase the term of the mortgage to bring down payments, with many banks capping the amount of the 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 the amount spent on a monthly basis, to service all their payments for borrowings past 33% of gross income. This leaves borrowers with sufficient income to spend, 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 non-residents, though other lending criteria may apply (such as making loans only available to homeowners or those with a certain level of savings, with minimum income criteria also prevalent).

The bank will take a charge on the prospective property the details of which will be outlined in the loan offer. The loan will generally be a non-recourse loan – meaning that in case of default the bank will only take the property as security and not pursue payment of the debt from other assets. This is one of the reasons the banks are so strict when asking for evidence of income and assets.

Quick facts

Maximum loan-to-value85% of the purchase price excluding taxes*
Minimum loan amounts€50,000
Variable ratesEuribor 3 month + margin of 1.2%-2.1%
Fixed ratesTec 10 + margin of 1.2%-2.1%
Capped ratesEuribor 12 month + margin of 1.8%-3%
Taxes and dutiesNew-build 2.5%**
Existing property 6.5**
Mortgage registration tax1.5%**

*   Net assests and earnings criteria will apply

** Estimations only

Mortgages for second homes in France

French mortgages for second home properties are now available for up to 85% of the purchase price excluding purchase taxes.

French banks are keen to finance second home properties and there are many reasons why getting a mortgage in France may be the right solution for you. French mortgage interest rates are generally 1-2% below the UK equivalent, so it may be cheaper to borrow the money in France. Also, it is generally accepted that it is safer to have your exchange rate risk based on the monthly mortgage payment of the value of the entire property.

For example, it would be better to pay 20% more for your mortgage payment on a monthly basis, than being forced to sell through a change in circumstances and finding the value of your property is 20% less than the mortgage used to buy it. In addition, as you receive rental income in Euros it makes sense to have a loan that is also paid in Euros which also lessens exchange rate risk. In the current climate where the Euro is historically strong (Jan 11), the prevailing exchange rate may mean a perceived currency exchange loss on purchase. It is worth considering a 100% Euro loan, if available; to reduce the requirement to transfer funds to Euros until the exchange rate moves more in your favour.

Mortgage related fees

By taking a mortgage in France, you will also have to pay mortgage registration tax which varies depending on the loan amount, but as a rule of thumb will be 1.5% for a new build property and perhaps only 0.75% or less for an existing property using a  “PPD – Privilège de Prêteur de Deniers”.

French banks will charge up to 1% as a fee to set up the loan though generally the amount will be lower than this. You will also have to open a French bank account, which will have an annual fee of approximately €100 per year. Athena Mortgages charges a fee as specialists which will be payable on acceptance of your mortgage offer.

Finding out how much you can borrow for a second home

The first step is to speak with a professional French mortgage broker who will ask a few important questions to establish your eligibility with a number of different banks. Initially the broker will want to understand your existing debt to income ratio. This is calculated by dividing your outgoings for debt payments by your gross income and should not exceed 33%.

In simple terms, this means that if you earn the equivalent of €3000 per month, a French bank will not allow your total payments for your existing borrowings and the future mortgage to exceed €1000 per month for a second home. In the case of a buy-to-let investment, this amount would be increased as the French bank may also allow you to deduct 80% of the future rental income derived from the buy-to-let property from your outgoings.

Second home mortgage products

French mortgage products for leaseback properties are designed to maximize security for the borrower as this is what the market wants. Therefore the majority of loans in the French mortgage market will be on a long term fixed rate or a capped rate. These product types ensure you know how much you will pay each month – or in the case of a capped mortgage, what your maximum exposure could be.

Variable length mortgages

The majority of variable rate tracker loans are ‘elastic’ and can stretch the mortgage term by up to five years if rates increase so that your mortgage payment will remain the same even if rates increase by as much as 0.75%. In addition, any increases to the mortgage payment are generally limited to the rate of inflation per year, meaning an overall increase of 2-3% per year.

Switching to a fixed rate

Further protection is offered by French law so that, should you take a variable rate mortgage, you will always have the option to call your bank and switch to a fixed rate for the rest of the term. Please be advised that if you make this switch, you may have a penalty to pay and you will not be able to switch back to a variable rate mortgage.

Good levels of security

These extra features offer peace of mind to the prospective borrower in France but do vary from bank to bank. It is important to get to the bottom of these features when comparing the different offers in the market.

Applying for a second home mortgage

Following the changes in the mortgage application process of certain EU countries, obtaining a mortgage in France is no longer harder to do than in its neighbouring countries such as the UK. Of course, the French are still very protective over the financial markets, including those relating to French second home mortgages products but in many ways this is why it is possible to source such favourable rates over such long periods.

This security means however that non-status lending and self-certification mortgages are not available. Each of the French banks has a slightly different underwriting criteria and so requires a slightly different set of supporting documents. Some banks may also require documents to be certified by a finance or legal professional.

The banks will require a full set of documents to process a mortgage application. We’ve listed everything you’ll need here  and we advise you to make a start on gathering them as soon as possible.

See what documents you’ll need

Worked example

The Euro Interbank Offered Rate is the rate at which French banks and institutions lend money to each other. This is usually the base rate at the time plus a margin: for one month (+ 0.1), three months (+ 0.2), six months (+ 0.3) and 12 months (+ 0.4). Most French banks with a variable rate base their rate on the Euribor 3 month plus their margin.