| French property loans tightening…


Interest from UK buyers in the French property market has boomed this year. Faith Glasgow offers pointers for investors looking to profit from holidaymakers.

Despite economic uncertainty, UK investors are returning to a longstanding favourite haunt – the French property market.

Prices have ‘rebounded’ over the past 12 months, according to French mortgage specialist Athena Mortgages, and interest from UK buyers has been growing since the start of 2010: new enquiries were up 72% during the first quarter of 2010 compared with the fourth quarter of 2009.

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Increased diligence and delays

Data out this month suggests that the excellent French property buying conditions will continue well into 2011 and perhaps the next increases in rates will only come in 2014. Tracker mortgages now seem to be the flavour of the month after comments by the ITEM club (Independent Treasury Economic Model) and Jean Claude Trichet, the president of the European central bank, have led to analysts predicting that rate rises seem a way off yet.

Lending for house purchases as a whole was up 3.4% across the Eurozone in June with France doing particularly well according to European Central bank data. The latest report from the FNAIM for June also confirms this for France as French property prices continue to remain stable with an increase of 0.6% in the last 3 months. French banks continue to lend at high levels of loan to value, up to 100% of the purchase price for a second home with some banks also including the purchase taxes in the loan for some property types.

French banks are keen to make the most of the historic interest rates, 1.75% for a 90% LTV tracker is the best we have seen for a second home purchase, but they are also cautious given the unusual economic conditions. What does this mean for your French mortgage application? Increased amounts of explanation required by the French bank and extra paper work required making for a longer application process. The high volume of clients now being scrutinised to a new level means that many banks are struggling to maintain their service levels. Add in the summer vacation season and we have a recipe for frustration, especially for those seeking a loan quickly.

If you are in a hurry to obtain a loan then make sure you gather all of the documentation together quickly and accurately and perhaps write a summary letter outlining your financial situation and how you manage your bank accounts. This will help your broker to quickly get up t speed with the best offers, perhaps running your situation passed a few banks to see which ones can make an offer in the shortest time. Mortgage offers can still be obtained quickly but extra diligence is required pre application to ensure that the application can go through smoothly. A good French mortgage broker is vital to getting the application quickly through the new checks.

New boost for French luxury property market?

Last year France signed tax exchange of information agreements with a number of jurisdictions including Jersy, Guernsy the BVI and Cayman Islands. The draft French laws to bring them into effect have been passed by both houses of the French parliament and are now in force and will have effect for the purposes of France’s 3% tax as of 1 January 2011.

Until now offshore trusts and companies based in the above tax havens had to pay a punitive 3% per annum on the gross market value of the properties which meant few such entities invested in France. This is now set to change as provided disclosure is made of the shareholders in such entities, no 3% tax will be levied.

According to French tax specialist David Anderson, “Investors are likely to seek asset classes not open to them in the UK such as ski chalets,vineyards and chateaux. The areas which are usually most attractive to foreign investors are the Cote d’Azur, Alps and Paris.

French Mortgage market trends: Banks tightening policy

The market for French mortgages is in good health as we pass the half way mark for the year. Most currencies have strengthened against the Euro meaning it is cheaper to make deposits on properties and the net cost of mortgage payments is also less. The pound is at a 19 month high against the Euro, in case you hadn’t noticed… The horizon for rate increases still seems a way off and mortgage rates remain at their historic lows. So for the meantime the buying conditions in France are improving overall.

On the flip side, this month we have noticed a tightening of bank policy towards accepting clients for French mortgages and some leaseback companies. Attitudes amongst many of the banks have now changed at there is more caution in the air. Now more than ever it is important to check your situation out with us before moving ahead to ascertain that there is margin in your application to ensure your loan is approved.

As we all know the past 18 months have been uncertain times in which the economy has slowed considerably. This has meant a reduction in gross profit for many self-employed borrower of the period 08/09. The reduction when taken in context with other years of business may seem reasonable given the economic context. However, we have seen several borderline applications refused due to “significant reduction in net revenues” over the past month. This indicates a returning level of conservatism on the part of the French banks which saw it almost impossible for self-employed borrowers to find loans in France in the mid-nineties. For salaried borrowers, revenue will have remained constant over the period but borderline cases are harder now to pass through the bank’s lending committee.

It is definitely recommended for self-employed borrowers to run their applications passed one of our brokers in order to avoid being refused. Our brokers have experience of the current market context and find appropriate loans for self-employed borrowers and those seeking maximum loans every day.

104% mortgages on leasebacks?

This month discussions with our partner banks has shown up a new trend when it comes to financing French leaseback property. Some of our partners are now looking to create a list of leaseback builders and management companies that are considered to be the most secure. For these companies new loan conditions will be in place which will in fact see loan to values increasing to in some cases cover 100% of the purchase price of the property excluding VAT and 100% of the legal fees and taxes

This will be fantastic news for overseas investors looking to secure prime leaseback property from major developers.

The end of interest only mortgages?

It’s been a busy month so far in the world of French mortgages as buyers are back in the market looking to finalise deals after the lull during the Easter period. We have a seen a good pick up in the numbers of client enquiries, with a rise of over 20% on last month. The French banks have resisted increasing their rates, as the European Central Bank maintained its base rate at 1% for the 12th consecutive month. The likelihood of any rate rises in the foreseeable future seems remote owing to the troubles in Greece in spite of the 1 trillion bail out facility put in place by European finance ministers under the watchful eye of Chancellor Merkel and the animated figure of the French Prime Minister Sarkozy, who with a puffed out Gallic chest declared that if the deal was not agreed he would withdraw France from the Euro. So the Euro will remain weak in the short to medium term, with low interest rates to boot making buying conditions in France as good as they have ever been.

Much has been written recently about the end of the interest only mortgage, which has been the product of choice for people buying investment properties. In France we have seen the withdrawal recently of several products offering interest only periods. The fact of the matter is that interest only mortgages are only a relatively recent addition to the portfolio of mortgage products available in France, and the conditions for obtaining such a mortgage have always been relatively stringent.

For a pure interest only mortgage, borrowers have to have 120% of the amount they wish to borrow in equity, either in property, liquid stocks, tradable shares or bonds. The alternative would be to have a large deposit of 20% to 30%, or to place a side investment in cash with the lending bank of around 20%. Even in this case the bank may restrict the period where interest only is paid, tacking on a repayment period onto the end of the mortgage.

In order to qualify for this loan, the would-be borrower will have to show that the monthly payment for the repayment (capital and interest) is affordable. We have seen a large increase in the number of borrowers looking to switch from a repayment mortgage to interest only, perhaps trying to release equity. However, with the reduction in the number of banks offering such products, this sort of loan is only available to those borrowers with the best profiles.

French property prices increase

French property prices in the first quarter of 2010 appear to have risen significantly compared to the same quarter in 2009. The figure, estimated at 7% by the Fédération des promoteurs constructeurs (Federation of house builders) saw increases in the prices for new build property at 3.6% in Lyon, 8% in Paris, Ile-de-France and an impressive 11% in the city of Marseille. The average price for a one bedroom apartment stands at €168,858 and a 4 bedroom house at €512,412. Overall, compared with the first quarter of 2009, sales of new homes have increase by 18%, with the numbers of sales doubling in the urban areas of Paris, Lille, Toulouse and Lyon.

It is always important to check which Euribor rate as well as the margin added to your loan and to compare like for like as a loan with a lower margin might be based on the much higher 12 month Euribor.

The FNAIM (Federation of French Estate agents) also published is quarterly report in May painting a slightly different picture, though it does take into account the whole of the market, not just new build prices. The figures published this month show an overall drop in average French prices of 2% since the same period last year, 1.9% for apartments and 2.2% for houses. The Paris property market has returned to growth with a yearly increase on average of 2%, which mirrors the growth seen for the whole of France with an increase of 1.8% since last quarterly result were published.

Cap and Collar mortgages, Fixed rates and Fixed payment mortgages

Over the course of the past month, more French banks have reduced their initial rates for non-resident mortgages in France. Although, the amounts are small, generally 0.1%-0.3%, these reductions do reveal increased competition in the market. The next point of competition will come when the overall spread, the amount of interest the bank adds to the loan as a margin, starts to fall again. These margins are approximately 35% higher than 5 years ago and should normally fall in line with increases in confidence and economic activity and rises in the European Central Bank rate.

In the medium term, I do not see the overall rates for new mortgages rising all that much, as there are still many structural problems in most European economies which make a return to growth and confidence still at least 12-18 months out. Any increase in the ECB rate should also see some accompanying reductions in the margins, keeping things quite stable in the medium term. In an interesting development today we can now offer a fixed rate interest only mortgage of 4.75% for 10 years, one for the investors.

As the general consensus is that rates will rise when the economy picks up, many of our clients are interested in mortgages which have a cap beyond which the rate cannot exceed. Rates are available from 3.75% on a +1%/-1% basis where the rate can increase by no more than 1% nor decrease by any more than 1%. Versions are also available at +2%/-2% and higher with the durations for these rates varying from 7 years up to 25 years. One thing to watch out for with cap and collar mortgages is the fact that the margin is only set on the day the mortgage is taken out.

Alternatives to the Cap and Collar mortgages are of course fixed rates starting at 4.10% for 25 years on a repayment basis and 4.75% for an interest only mortgage fixed for 10 years at high loan to values. In addition, the curious and popular ‘elastic duration’ French loans are available from 2.6% over 30 years. These ‘elastic’ loans with variable durations have a fixed monthly payment but the duration of the mortgage can extend by up to 5 years. Once the limit of 5 years is reached, your monthly payments can then start to increase, but by no more than French inflation per quarter or year depending on which Euribor index the loan is based on.

Details on the purchase of a classic French “Maison de caractère”

Buy of the month Purchase of a classic French <<Maison de caractère>>.

Emily, from London, fell in love with a presbytery renovation project in the middle of France in an area she knows well with a purchase price of €85,000.

Emily chose a 25 year fixed rate at 4.35% through Athena Mortgages for this her first ever purchase, putting down €25,000 to cover deposit of €17,000, purchase taxes of €6,400 and fees of €1,600.

Her monthly payments for the mortgage €69,840 are €388 with life assurance payments of €17.

Long term fixed rates like this are common in France. It is important to note that there are always early repayment penalties for fixed rates which are usually half the interest rate on any sum you pay off early.

Conflicting messages in the French mortgage market. Have we reached the bottom?

This month has seen some banks raising margins for non resident French mortgages, whilst others have lowered their rates, indicating some uncertainty in the short term. By comparison, in the resident market for mortgages in France, rates are still falling for both fixed and variable rate mortgages indicating competition for borrowers as the European central bank rate has not changed for many months. Stability is returning to the French housing market, with the average property prices up 0.6% in February, apartments up 1.4% and houses stable at -0.2% according to the FNAIM. What seems clear is that with any improvement in economic sentiment in the EU, French mortgage rates will begin to climb.


Changes to the rules for French life assurance

Many international buyers of French property are surprised to find that life assurance is compulsory for all French mortgages. Even more surprising is that the majority of French banks only allow applicants to use the life assurance recommended by the bank. However, this seems set to change with the Lagarde Reform which is currently going through the French legislative process. The main provision of this project lies in Article 17 which amends Article L. 312-9 of the Consumer Code as follows: “A lender may not refuse to secure another loan insurance contract when the contract has a level of security equivalent to the insurance contract that offers”. Other amendments are also being proposed to strengthen consumer rights in this regard and the changes are expected to come into force on the 12th May 2010. This shake up should bring in more competition which is long overdue within the market with some insurance brokers saying that insurances costs may go down by over 50%. Typical insurance costs for a French mortgage are €30 per month per €100,000 borrowed.

Capped payment mortgages for investors

Since the beginning of the year we have had a large volume of investors buying leaseback properties all over France. Whilst interest only products for these sorts of purchases have been popular in the past, many investors are now choosing repayment products for their leaseback properties as current rates are so low.

One of the attractions of taking out a French repayment mortgage is that the monthly payments on these mortgages are usually capped in some way, giving security. Whilst 25 year fixed rates are available at about 4.5%, variable rates are 2.4% for this duration, making the headline numbers for investments with 4% yield look very manageable.

For example one of our partners has a leaseback with a household name management company where a 5% deposit will get you a property of €300,000 on a repayment basis over 30 years with a monthly payment after rental income is taken into consideration of less that €100 per month. This payment will remain more or less fixed as both the rental income and the monthly payment increase by the rate of inflation.

If you put your deposit and €100 into a savings account you would need an average rate of return in excess of 10% per year to get close to the a rate of growth in the value of the property at 2.5%. Interesting eh?

Athena Mortgages will keep you up to date

This is the first monthly newsletter from Athena mortgages which is in direct response to the number of people requesting to be added to our mailing list on our website. In this newsletter we will keep you up to date on the factors affecting the French mortgage market for international investors, as well as information on products and interesting case studies. We hope you find this synopsis of key information useful and if you have any requests for information you would like to see here on a regular basis, please let us know.


Rates move up due to EU economy fears

Average rates seem to be trending upwards as it seems less likely the ECB will raise the base rate. Banks are looking for other ways to boost their coffers, so are raising margins to enable them to offer higher interest rates. The news from the savage cuts to public spending required in Greece, Spain, Portugal, Ireland and the UK will mean lower inflation for the medium term. We have locked in some rates for offers published in the next 2 months but clients have to move quickly to provide complete applications to stand a chance of getting the rates and conditions.