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. 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.
|Maximum loan-to-value||100% of the purchase price excluding taxes*|
|Minimum loan amounts||€50,000|
|Variable rates||Euribor 3 month + margin of 1.2%-2.1%|
|Fixed rates||Tec 10 + margin of 1.2%-2.1%|
|Capped rates||Euribor 12 month + margin of 1.8%-3%|
|Taxes and duties||New-build 2.5%**|
|Mortgage registration tax||1.5%|
* Net assets and earnings criteria will apply
** Estimations only
French banks and French laws are well set up to deal with the purchase of leaseback mortgages in France to non-residents and unlike in Spain, it is possible for the transfer of title to take place before the property is built. This gives reassurance to the buyer as the mortgage can be arranged in the months prior to exchange. One can also be certain of the loan amount and the conditions of the mortgage before the signature of the sales deed.
As there will be some sort of construction period during which the leaseback is constructed, you can ask for a deferral period during which, depending on the bank, you will only have to make life assurance payments for a period of up to 36 months.
The amount of interest accrued during this deferral period will be calculated pro rata on the sums drawn to cover the staged payments during the construction. This means that you will not have to make full payments for your leaseback mortgage until you receive your first rental income payment from the managing agent. Other options for the construction period include paying the interest during construction or starting repayments immediately.
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. French Private Finance charge a fee as specialists which will be payable on acceptance of your mortgage offer.
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 leaseback 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 leaseback property from your outgoings.
The Amount French Banks Will Lend
The level of finance available to you in France will depend on your financial situation – and also the bank’s underwriting criteria for the particular development you are considering. Some banks will set their level of funding for leasebacks at 80% of the purchase price, excluding the VAT. So in effect there are a large number of banks keep it simple, ensuring there is a large amount of equity in the property before they make a loan. A smaller number of banks have more specialized criteria and underwriting departments that look more closely at the specifics of the development itself and also of the management company.
If the leaseback development is backed by one of the top management companies, you will find 100% finance of the purchase price (excluding VAT) available on a range of products, though for interest only mortgages only short term deals are currently on offer. If you find a product like this, you will have to move quickly to secure a unit if your strategy is to put down as little money as possible. Banks will apply a quota to the development so the product may not be available for very long.
If we take as an example an 800 unit development, you might find that one banking group might only finance 60 units at 100% loan-to-value, the rest being financed at a lower loan-to-value or perhaps not at all. As the foremost leaseback mortgage brokers, we constantly review the market to find the best deals for each development we work on.
Leaseback 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
urther 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.
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 leaseback mortgage 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 certifies 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 hereand we advise you to make a start on gathering them as soon as possible.
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.