The Ultimate Guide to French Mortgages For Non Residents

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Current French market conditions

Current French market conditions

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.

 

What’s happening in the French mortgage market?

French mortgage interest rates are just above their all time lows and offer incredible long term value for money.

One the most popular mortgages for non-residents is a 20 year fixed rate repayment mortgage, for which rates have dropped from near 4.0% in 2011 to today’s rate of 1.4% or below depending on the banks. On a mortgage of €400,000, this drop in rates is equivalent to a saving of more than €120.000 (about two thirds) in interest over the 20 year term.

French Mortgage Rate Drop

French Mortgage Interest Rate Shifts 2012-2020

Why is now a good time to get a mortgage in France?

There are two main reasons why so many people are using French mortgages for their property purchases in France, even in some cases when they could buy outright in cash:

 

By taking out as high a French mortgage as possible, buyers are offsetting the effects of weaker currencies, particularly Sterling, in anticipation that they will improve against the Euro.
Buyers want to lock in the ultra long term rates now. These rates are incredibly low and offer a once-in-a-lifetime chance to secure an interest rate which in some cases is half of the rental yield generated by the property.

What mortgage for which location?

France is the most visited country in the world and one of the most popular destinations for retirement. The main reason for this is its varied mix of geography. From warm beaches and effervescent cities in the south, to snowy mountains in the east. Paris in the north and a dramatic mix of landscapes in between.

This means that one person’s reasons for buying in a certain location can be very different from the next.

One of the main ways French mortgages differ to those in the UK is that you can fix the rates for such long periods; normally from 15-25 years. This means that with the current low rates, non-resident buyers can secure amazing long-term value through their French mortgage.

 

Different Mortgage Interest Rates Throughout France

Why are mortgage rates in France 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.

 

Backstory: stability through secure, conservative, lending

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.

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.

 

How much can I borrow for a French mortgage?

Overview

The best first step is to read this guide and then 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.

Each French bank has different underwriting criteria and products, so running your situation past a broker will help you to understand your options. French banks are notorious for saying yes at the beginning of the process only to perform a ‘volte face’ at the last minute, leaving would-be borrowers frustrated as the purchase deadline approaches. We see many cases like this, and so we aim to reduce the risk of wasting time and money by applying the ever-evolving banks’ criteria in advance to seek out the most appropriate offers, based on our experience of the current market conditions. As brokers we do not carry out UK credit checks, but can give a decision in principle. French banks will carry out a credit check once they receive your French mortgage application form.

 

General rule of thumb

As a general rule of thumb, you can borrow 5 times your individual or combined (spouses/ partners) income for a repayment mortgage in France, less the value of your existing mortgage balances.

With interest only mortgages you can borrow 10 times your income, less outstanding mortgage balances. To obtain an interest only mortgage in France you must have net assets outside of your main residence which at least equal the value of the mortgage.

Of course, each buyer’s application is looked at individually to see what they could potentially afford to borrow and there are variations depending on mortgage payments and how income is considered. Whilst this is a good rule of thumb, it is worth contacting us for a noobligation consultation.

 

A conservative and sustainable approach

how much can I borrow for French mortgage?

French Mortgage Loan Example

 

French mortgage how much can I borrow example

French Mortgage Calculator

We have a calculator here so you can check how much you can afford to borrow in France. It works by calculating your debt to income ratio – For more details, try out our French mortgage calculator.

 

Debt-to-income ratio calculation

What we are looking to see is if your existing monthly payments for loans and mortgages exceeds one third of gross monthly income. This is calculated by dividing your outgoings for debt payments by your gross salaried income or net profit from self-employed income.

For example, if you earn the equivalent of €3,000 per month, a French bank will not allow your total payments for your existing borrowings and the future mortgage to exceed €1,000 per month for a second home – €1,000 being 33% of your gross monthly income.

Formula: (annual gross income + 80% of rental income) x 33% / 12 – what you pay already in mortgages and loans and rents = what is left for you to spend on the French mortgage.

 

Rule of thumb:

For a repayment mortgage over 20 years, for every 100,000€ borrowed, it costs 500 € a month.

For an interest only mortgage, for every 100,000€ borrowed, it costs 250 € a month

 

How is rental income considered for the debt ratio in France?

80% of the rental income associated with your existing property investments is taken into consideration when calculating affordability. Sometimes the rental income is deducted from the mortgage payment – which is advantageous to the borrower, though more conservative lenders may simply take existing rental income and add it to the borrower’s main income, which would effectively mean that only 25% of the rental income is being taken into consideration when calculating the debt ratio.

 

What is the effect on the debt ratio and conditions if I want to rent my French property out?

The Anglo-Saxon notion of a buy-to-let where the property is a standalone investment has a limited shelf-life in Anglo-Saxon markets who are moving closer to the French model where there is no separation between the investment and the borrower’s personal income situation.

The positive point here is that all French mortgages work both for second homes and rental properties

The downside is that in most cases the rental income from your new property purchase in France will not be taken into consideration. This means a borrower’s full profile is required when considering a property purchase in France.

 

What if the French property is connected to a business? How is the income considered?

We have had many calls from people wishing to purchase a commercial property in France. Especially popular are gites and fishing lakes. Sadly, these types of properties are not financeable by the average, everyday French bank as they are considered to be commercial activity and hence require a professional loan for businesses. The only caveat is if the plan is to convert the property – or it is not apparent that the property is commercial. 

 

Types of income considered by French Banks

Income which can be considered for the purposes of French banks are as follows. It is best if everything is evidenced on a tax return.

– Salaried income

– Dividends with a three-year track record

– Other regular income from investments

– Income from partnerships

– Pension income

– Rental income with tenancy agreement

 

Types of outgoings which may be taken into consideration by French banks

Payments for loans, personal loans, car loans, credit cards (unless cleared each month), mortgages, alimony, hire purchase, insurance policies, rent. French banks do not take school fees into consideration for the debt ratio.

 

Credit checks

As a broker, we do not carry out any credit checks. One or two French banks may run an Experian check on borrowers once they receive a signed application form, however in most cases there is no credit check in France. Instead, they run a forensic check on applicants’ income via tax returns, pay slips, bank statements, employers’ letters, rental agreements and mortgage statements etc.

 

Status-only lending

With most French banks, things are done by the book – there is little room for discourse as all they want to see are the correct documents that help them to pass the application up through the approval process. They are interested only in the status of you and your finances, so we often call this ‘status-only lending’, which differs from private banks who can take more of a holistic view when assessing your needs. If the purchase is over €1M, then the flexibility of a private bank which lends for property purchases in France may be an attractive option.

 

What percentage of the French property can I borrow?

 

French Mortgage Loan to Value achievable by non residents

Collateral requirements with French banks

The typical, classic French mortgage from the ’80s would have been a 15-year repayment mortgage up to 70% of the purchase price. Nowadays, a 20-year term is more common, though French banks are willing to provide a loan of 100% of the purchase price with the proviso that instead of paying the 30% into the property, the money is placed in a savings account with the French bank. This is more on the spectrum of private banking, and our clients often use this method to access even lower interest rates.

The way the savings are managed varies from bank to bank. We recommend using a financial advisor in your home jurisdiction to help with decisions on how to invest this money.

 

How the choice of mortgage product affects the amount you can borrow in France?

The monthly repayment amount of your French mortgage (or any of your existing mortgages) is a key consideration for French banks and will influence how they will lend.

The two main factors here are the duration of the mortgage and whether or not the loan is on a repayment basis. The shorter the duration, the higher the cost. The lowest cost will be if you take a mortgage on a part interest-only or full interest-only basis. Interest-only mortgages in France are few and far between and usually require a savings account to be opened with the bank.

Below is a table of the rule of thumb cost per 100k borrowed that we use when doing a preliminary French mortgage affordability calculation

 

Cost per month per 100k borrowed

– 10 years repayment product          925 per month

– 15 years repayment product          650 per month

– 20 years repayment product         500 per month

– 25 year repayment product           425 per month

– Interest-only mortgage product   250 per month

 

Of course, these costs fluctuate given the rate environment and also if we have to factor in payments that are included in the mortgage towards a life assurance contract. However, this is a good rule of thumb table as it generally varies very little and is close enough for estimation purposes.

 

Repayment vs interest-only mortgages in France

In France, repayment mortgages tend to be the norm for main residences, while interest-only options (when available) are typically reserved for investment properties. This helps to lower the borrowing risk on the property you actually live in, and reduce the running costs on investment property that you plan to sell after the price has gone up. This certainly applies to speculative property markets.

Given that the French property market is more of a long-term hold due to a history of stable property price growth since 2000 and the availability of 20-year fixed-rate mortgages on a repayment basis, many people opt for a repayment mortgage over an interest-only one. Of course, there is a market for interest-only mortgages, especially for those expecting a windfall in the near future where the funds to pay off the mortgage will become available.

A repayment mortgage has the certainty of being paid off at the end of the term, whereas an interest-only mortgage still has the full balance left to pay at the end of the term. Interest-only mortgages are notoriously difficult to refinance in France – unless a private banking solution is sought. If in doubt, experience has taught us to recommend that people take a repayment mortgage.

 

Assets

Some banks look at the assets a client holds before deciding to offer a loan, and many of them apply a net asset criteria for certain loan-to-values and products. A good example of this is an interest-only loan, for which some banks may ask to see a net asset position of 120% of the loan amount.

Net assets are found by taking existing asset values such as property owned, share or bond portfolios and money in non-pension savings accounts and deducting all outstanding loan amounts. If the eventual amount is more than 120% of the loan amount desired, the French bank should have no problem making the loan – though income criteria still apply.
Other banks, however, may require you to be a homeowner, or that you hold 30% of the purchase price in cash before accepting you as a client.

In any case, you need to have enough savings to support the deposit, the fees and prove that you have enough savings left after the purchase for the rainy days.

 

The way French banks think

A quick comment here on the attitude of French banks. It is a little hard to lump them all together, though there are definitely some patterns. Whether we are dealing with a national company or a single small branch banker, they will be extremely fastidious. It is unusual to be able to skip any part of the process or to substitute any of the documents they require for another.

Their attitude overall is that they have enough people for the vanilla offering they have (and who neatly fit into the boxes they have) – so why waste time on anything non-standard? Of course, a broker will have some experience in presenting applications to the lender in a way which will be more acceptable to them, so our recommendation for applications in France and elsewhere is… always use a broker!

 

Age-related considerations for mortgages in France

Each bank will also have an ‘age ceiling’ which will affect the amount you can borrow. The maximum age we are aware of permits loans to be completed at the age of 85, though the vast majority finish at 75.

The effect of this can be that, for certain lenders, the duration of the loan may have to be shorter than they would have liked – and the mortgage payments would go up accordingly, thus reducing the amount that can be borrowed.

Another factor can be the desire for the French bank to get an idea of the lender’s income situation into retirement. This can mean that either the retirement situation is documented clearly, or a “haircut” of 40% may be given to the current income situation. This will also affect the eventual debt ratio.

When considering joint applications, the age of the older borrower will be used when deciding what the maximum duration would be. The only exception is when the income from the older borrower is not being taken into consideration. Age is also a consideration when setting the amount which will usually have to be paid for life assurance to cover the loan in France.

 

French Mortgage Broker Fees

You can read more about our terms of business here in our service disclosure document. Our service as brokers is usually remunerated at around 1% of the loan amount. This takes into account the value we add in terms of the network of contacts we have created over the years, as well as the costs of maintaining that network. We will usually save our clients money over the course of the loan via accessing lower rates and also help make the experience of getting the mortgage as stress-free as possible – a considerable plus for many clients given the difficulties of working across cultures and borders.

In some cases the bank will pay this fee to us, which makes our service free to use for our clients. In other cases the fees are charged to the client directly.

In all cases, a full range of options will be presented to you with all fees and taxes presented so that there are no budgeting surprises.

 

What changes if the loan is for equity release or refinance?

The affordability calculation does not change for equity release or refinance mortgages in France. One point to note is that it is very difficult to release equity from properties in France unless we are at the private banking level.

For refinance loans, there is a curious policy in France that they do not really like to extend the duration of the loan by much – they will typically only stretch to an additional 25% or so at the most. So if, for example, a loan with a 20-year initial rate has 10 years left, it is unlikely that the French bank will want to extend the term to much more than 12.5 years. This means that when refinancing, the actual monthly cost would not decrease as much as one would expect as the duration cannot be extended by much! In addition, the costs to refinance – including the mortgage registration tax and any early repayment charges – are usually in the region of 3-5%, meaning that the new rate you are securing needs to be at least 0.5% lower than your existing rate for this to be even remotely appealing. The best course of action would seem to be to get a French mortgage and then hold it until the end of the term, by which time it should be paid off without any complications.

 

What is the process to get a mortgage in France?

Overview

The process of getting a mortgage in France should start with a deep breath, as there will certainly be some practices and customs of the French bank that you will not be prepared for. Even with decades of experience between the members of the FPF team we are still stumped sometimes by seemingly nonsensical requests from lenders.

We advocate beginning the process early, speaking with a broker and completing an application form so that a plan can be made to optimise all aspects of the mortgage. You can find an example of the application form here or you can read the section on how to calculate your affordability for a French mortgage.

 

What’s the process?

French Mortgage Process

Decision in principle

It is advisable to check your affordability as early as possible, as this will help you target the right properties. It also means that we can find the right bank for you as quickly as we can.

 

Build your application

Underwriting criteria:

Each of the French banks has 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.

 

How should I buy a French property? In my own name or in a company structure?

It is worth considering at the outset if you will hold the property in your own name or purchase via a company structure. French banks will lend to Societe Cilvile Immobilieres (SCIs) and SARLs (two types of French companies) if they are comprised of close family members (parents/children buying together, siblings too – but not cousins or friends). A discussion of relevant tax implications can be found in the French tax section. 

French banks do not lend to UK companies nor can a UK company be a shareholder for an SARL de Famille, according to our research.

Please remember that the above information is for informational purposes as a jumping-off point for discussions with qualified professionals and should not be relied on without a full appreciation of your personal plan and circumstances.

 

Required documentation for a mortgage in France

The documents required to support a French mortgage application are as follows:

 

Identity Details

– Certified copy of a passport for each borrower

– 2nd proof of ID (ideally birth certificate, else driving licence) for each borrower

– Copy of marriage / divorce certificate

– Utility bill less than 2 months old (electricity, gas, water) – council tax is not allowed by French banks

 

Employment Details

If employed

– Headed letter of the employer specifying professional status, length of service, gross annual income and bonuses for the last 3 years

– Last 3 months payslips 

– Last 3 years P60s and tax returns

If self-employed

– Last 3 years of the company accounts (with profit and loss)

– Last 3 years tax returns 

– An accountant letter breaking down your income for the past three years. This should include salary, dividends and any other income. For the company, it would be good to have, in the same letter, confirmation of the last three years turnover and net profit/loss. If they could add a work on the financial stability of the company and its ability to continue to support your income from its activity that would be great. 

If Societe Civile Immobiliere

– KBIS extract less than 3 months old

– Status of the SCI or project of the status if the SCI is being put in place

– Last 3 months bank statements 

– RIB / IBAN (account details)

 

Financial Details

– Last 3 months bank statement of all current accounts 

– Last 3 months bank statement of all savings accounts

– Copy of the most recent loan statement or the original offer

– Last 3 months statements of your credit card bill

– Email explaining large and regular transactions

 

Property Details

Main Property 

– Tenancy agreement signed

– Title deed from land registry and copy of the most recent mortgage statement or the original mortgage offer

Investments property(ies)

– Title deed from land registry and copy of the most recent mortgage statement or the original mortgage offer

– Tenancy agreement signed if rented out, any recent documents proving your rental income such a lease contract if no tenancy agreement

Property to finance

– Contact details of someone for the valuation of the property by the bank

– Copy of compromis de vente (contract of sale) signed by both parties

– Copy of reservation contract signed by both parties

Situational

– Quotes

– Marches de travaux

– Assurances decenale for each builder

– Architect contract

 

Selecting the mortgage product

French mortgage products

French mortgage products are designed to maximize security to 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.

 

Repayment mortgages

Repayment mortgages are generally more expensive as you have to pay the interest on the loan amount and also pay off a portion of the capital each month. Of course, with French mortgage rates so low at the moment, the long-term value can be substantial, especially when compared to rates of other European countries. Repayment mortgages are often called ‘capital and interest’ mortgages and the payment for €100,000 may be, say, €7,200 per year – almost double the cost of an interest-only mortgage. Repayment mortgages are best used for main residences or for investments, such as leasebacks, where the aim is to pay the mortgage off and/or enjoy the income. Repayment mortgages (prêt amortissables) are the most common mortgages in France and offer the most protection.

 

Interest-only mortgages in France

With an interest only mortgage (prêt in Fine), as the name suggests you only pay the interest on the amount you borrow. If you borrow €100,000 at a 2.5% interest rate you will have to pay €2500 per year. After 20 years you will still owe the €100,000 and have to sell the property or find funds from elsewhere to pay back the money you have borrowed. Hopefully the property you bought will have appreciated in the meantime so you will have made a profit whilst keeping your costs down.

Interest only mortgages are the mortgage of choice for investors looking to make a return by selling the property for more than the purchase price.

 

Security

Most borrowers (and all lenders!) want security in their financial plans, which is why the long-term fixed rate is our top product. It offers low rates for a long time, safe from market risks.

Some clients, however, prefer a variable rate so that they can avoid early repayment charges – they also tend to consider the risk of rates suddenly increasing to be low. Generally, these borrowers are expecting an income boost in the near future that they will use to repay the loan.

There is an in-between product that offers some security (the rate is capped so the exposure is limited) while benefiting from the advantages of the variable rate: it’s known as the capped variable option.

 

Fixed rates

The majority of loans in France for French property utilise a fixed rate for the term. Fixed rates are available over 10, 15, 20 and even 25 years. The rate is fixed for the entire duration of the mortgage. This offers a high level of certainty as to the monthly payment. 

 

Variable rates

The majority of French variable mortgages are capped, meaning there is a maximum rate that the mortgage can reach for a set duration.

The duration of some 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 to the amount you pay of 2-3% per year. Due to the current fixed rates, French banks are now offering relatively few variable rate options.

 

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. 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 various offers on the market.

 

Good levels of security

These extra features offer peace of mind to the prospective borrower in France but also vary from bank to bank. Borrowers should make sure they have a good understanding of what is available.

 

The Approval process

The documentation will be received and reviewed by an underwriter who will check the affordability and review the documentation. He/she will raise questions and ask for further clarification or documentation.

Once that hurdle is cleared, the underwriter will send the application on to a risk committee and/or compliance committee depending on the bank. For a large loan, the application may pass through several more committees before approval.

 

Purchase through a company

If you are buying the property inside a company structure, you will have to provide the name of the company and perhaps the draft statutes at this stage. The loan can be approved with just the drafts but the mortgage offer will not be printed until the company has been finalised together with the bank account for the company, which may well require a trip to France. So be prepared!

 

Life assurance and French bank account opening

Once the rate has been agreed and secured, then the required French life assurance can be sorted out. This process involves completing a medical questionnaire and possibly undergoing some tests and waiting for the results. Then the rate of the insurance can be added to the mortgage contract.

 

Eligibility for the insurance 

Age is an important consideration when setting life assurance rates in France. Younger applicants will obtain cover with lower monthly payments, whilst older applicants will pay more.

If you have had any medical problems in the past, or you are borrowing a large amount of money, you may find that the French life assurance company will ask you to undertake medical tests.

You may be refused life assurance altogether if you have had serious medical problems. However, it may be possible to arrange a loan without life assurance in some cases or to assign UK life assurance cover, but only for a reduced selection of French mortgage products. 

 

Opening a French bank account for individuals

Opening a bank account in France is a crucial part of obtaining your French mortgage. The point at which you have to do this is normally three or four weeks after you’ve started the French mortgage application process.

Whether you plan to live in France or have a second home in the country it will all be easier – and is generally a condition of the loan – if you have a French bank account.

 

Opening the account

The process for opening a bank account in France is very quick and simple for an individual. Firstly, you need to fill in and sign the appropriate forms. They will be in French, but we provide English translations of them so that a comparison can be made.

In addition to a scanned and completed form, there are also a number of other documents required in order to open a bank account in France:

 

– Signed application form

– Copy of valid passport

– Marriage certificate (copy)

– Recent utility bill (copy) – less than 3 months old

– Proof of income (tax document, accountant’s letter or last two payslips)

– The reservation contract/title of the property in France


Once these items have been provided, we normally just need 48 hours to open an account.

However, most lenders will want you to open a bank account in their own branch and will require a face to face meeting. Be ready to travel to France for this part!


Joint accounts

If you wish to open a joint bank account you have the option of the account being held as M. et MME. SMITH or M. ou MME. SMITH. In the former case both partners must sign and in the event of one partner dying the account is frozen until the will has been proven. If you wish to have a joint account where either partner can sign and draw on the account then you must choose the second option. A quick French lesson: ‘et’ means ‘and’ whilst ‘ou’ means ‘or’; M stands for ‘monsieur’ while MME means ‘madame’.

 

Banking hours

French bank opening hours are quite variable, depending on the location, size of branch and so on. In general, they are open from 09:00 to 17:00 Mondays to Fridays. Some banks will open on Saturday mornings and late on certain evenings, though this is more likely in larger towns. Lunchtime closing is the norm in smaller towns.

 

Opening a bank account for a company

The process to open an account for a company is not that straightforward unless the bank providing the loan also opens the account. If we have to use a different bank then it will most likely require a trip to France.

 

The offer

With the French account open (so that the direct debit form can be completed) and the life assurance in place, the bank will be ready to print the offer and to send it to you via DHL, FedEx or similar.

Once you have received the offer you will have to wait 11 days before you can sign and return it. Unfortunately this “délai de réflexion” cannot be waived or avoided. The only exception to this is that some banks will allow you to return the offer the next day if the mortgage offer is in the name of a company. This varies from bank to bank and some argue that as there is a personal guarantee involved from the clients (who are the guarantors of the company), the full 11 days should be waited.

During these 11 days you may use the time to either prepare a trip to France to sign and complete the purchase and transfer your personal funds; alternatively you can arrange for a power of attorney to be completed so the Notaire (the French legal representative that must be engaged for all property sales) can sign on your behalf.

 

Power of attorney

Arranging a power of attorney is a simple task, though there is some administration to do. The Notaire will arrange this “pouvoir” (power) once he/she has a copy of your mortgage offer and send you a copy. This document and the mortgage deed have to be completed in front of a public Notary in the UK and then the document has to be “apostilled” at the Foreign and Commonwealth office to ensure the validity of the witnessing signatures. There are services that can get this done for you – let us know if you need an introduction.

 

Completion

The minimum time between the bank receiving the offer and transferring the funds to the Notaire so that the purchase can complete is 2 to 3 days. It is not worth planning on less than a week, however, just in case there are any delays.

Completion of the purchase takes place in the Notaire’s office – either with you physically present or by the Notaire alone with the requisite power of attorney.

 

Fees and taxes at completion

The Notaire will send a breakdown of all the funds which have to be transferred. This will include the “Notaire fees”. This is a catch-all term which breaks down as:

 

STAMP DUTY

(cost on the purchase price)

Purchase Price OFF PLAN EXISTING
100,000 3.52% 8.85%
150,000 2.95% 8.20%
200,000 2.66% 7.88%
250,000 2.65% 7.68%
300,000 2.38% 7.55%
350,000 2.29% 7.45%
400,000 2.23% 7.39%
450,000 2.18% 7.33%
500,000 2.15% 7.29%
600,000 2.09% 7.22%
700,000 2.05% 7.18%
800,000 2.02% 7.14%
900,000 2.00% 7.11%
1,000,000 1.98% 7.09%
1,500,000 1.92% 7.03%
2,000,000 1.89% 6.99%
2,500,000 1.87% 6.97%
3,000,000 1.86% 6.96%

 

 

MORTGAGE REGISTRATION TAX

(cost on the mortgage amount)

Loan amount OFF PLAN EXISTING
100,000 1.66% 0.81%
150,000 1.52% 0.67%
200,000 1.46% 0.60%
250,000 1.41% 0.56%
300,000 1.39% 0.53%
350,000 1.37% 0.51%
400,000 1.35% 0.49%
450,000 1.34% 0.48%
500,000 1.33% 0.47%
600,000 1.32% 0.46%
700,000 1.31% 0.45%
800,000 1.32% 0.44%
900,000 1.29% 0.44%
1,000,000 1.30% 0.43%
1,500,000 1.28% 0.42%
2,000,000 1.27% 0.41%
2,500,000 1.26% 0.41%
3,000,000 1.26% 0.40%

 

His fees for conveyance of the property will vary and will have to be added.

 

Mortgage-related fees 

By taking out 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”. This is included in the Notaire’s breakdown.

French banks will charge up to 1% as a fee to set up the loan, though generally the amount will be lower than this and not usually included in the breakdown as this is usually transferred directly by the buyer to the bank.

You will also incur fees with your new French bank account, which will have an annual fee of approximately €100. French Private Finance charges a fee as specialists in securing and adding value to the mortgage process which will be payable on acceptance of your mortgage offer. Usually, the combination of bank and broker fees does not exceed 1% of the mortgage amount.

 

Post completion

Once the transaction is completed and a glass of Champagne consumed, thoughts will turn to the first mortgage payment. You will have set a date for this during the mortgage application. Often the bank fees connected to the application will be taken with the first mortgage payment.

 

Difference for off-plan properties

French banks and French laws are well set up to deal with the purchase of off-plan properties 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 property is being built, you can ask for a deferral period during which, depending on the bank, you will only have to make life assurance payments until the property is completed.

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 may not have to make full payments for your mortgage until you receive your first rental income payment from the managing agent (if you are buying off-plan to let). Other options for the construction period include paying the interest during construction or starting repayments immediately.

 

Private banking in France

What is private banking?

A private bank is an institution focussed on growing the amount of money it manages through concierge-like customer service and investment excellence.

It aims to manage client assets to generate returns and preserve capital. Private banks – as opposed to their retail banking counterparts – do not engage in anonymous high-volume mortgage lending, preferring a more intimate relationship where trust can be established and a holistic view is taken to each client’s financial needs.

Taking this broad view to the financial lives of those who have entrusted a portion of their wealth to them, private bankers may also seek to act as a one-man family office, connecting the client with experts in tax or making other suitable introductions depending on the project at hand.

 

Why do people use European private banks to purchase a property in France?

Those seeking flexibility

Approximately 50% of French property buyers who use a private bank to arrange finance are taking advantage of the greater flexibility which can be found in terms of the underwriting criteria of the various banks. This ability to take a more bespoke view, as opposed to the ‘one-size-fits-all’ approach of the retail banks, means that mortgages and loans can be obtained for those with even the most complex financial situations – though the bank will need certain assurances that a wider financial relationship with the client is possible.

Those seeking optimisation

Others seek a private bank to optimise their purchase. A private banking arrangement for a property purchase can be looked at as one of the only occasions where you can have your cake, eat it – and get slimmer. Owing to the asset and investment management relationship that the private bank has with its clients, the interest rates on offer can be very low. Low rates, when combined with not having to place any deposit down for the property and getting 100% finance, means that any existing investments can be left where they are, generating income to help cover the interest on the loan whilst at the same time enabling buyers to enjoy the benefits of property ownership.*

 

* FPF does not offer advice on investments or make any warrants as to the suitability of each private bank. Our advice is always to keep funds in cash to support the loan. Any investment decision is made between the bank and the client.

 

What does a private bank consider when taking on board a new client?

Private banks are motivated by the desire to increase the amount of assets they have under their management. As this is one of their main measures of success, they are very interested in speaking with UHNWIs (Ultra-high net-worth individuals: people with investable cash or assets excluding property of more than $30M) and HNWIs who can place large amounts of money under management. Given that the number of people meeting this definition is small, private banks will often begin working with people well before they reach this status, hoping that they can help them get to the next level. 

In terms of making a property purchase, one of the first things private banks look at will be the size of the deal (the purchase price and the mortgage that is required), with a particular focus on the assets that the bank will be managing post-deal.

 

The second element is the ratio between the amount of assets and the loan the client is seeking to take out. Banks across Europe are subject to the Basel 3 capital requirements which lay out in particular the Tier 1 capital ratio, which is explained further below:

– Core equity capital (cash, investments)

– Risk weighted assets (mortgages, liabilities)

 

In simple terms, private banks do not really want to enter into loans which are going to decrease their ratio, i.e. add a mortgage or a liability to their books without taking pledges over financial securities to offset this. This is why a Lombard loan is so attractive: the higher the ratio of assets to loan you take, the more flexibility there can be.

 

What is a Lombard loan?

A Lombard loan is a loan secured (pledged by the bank) purely against liquid financial assets as opposed to a mortgage loan secured against a real estate asset. Simply put, you give the bank 100 to look after and they will lend you 100. As there is very little risk for the bank, the interest rate on this type of loan is very low. One of the main reasons for using this type of loan is that it means a client’s portfolio does not have to be liquidated to pay for the real estate. There are other financial advantages, too: interest can be offset against rental income, while the loan itself can be offset against wealth tax to reduce or even cancel it out completely.

 

What does a typical arrangement look like?

There are two main options when accessing a private banking arrangement. It is possible to find optimal levels by blending the two concepts to find the best value.

 

Option one: Minimise funds transferred to the bank

The private bank takes the property as collateral and gives a lending value to it. 

In this scenario, we seek to find a lender who will lend 100% of the amount required to purchase the property. We then look to see if we can minimise the amount of assets which are required by the bank. 

 Under normal circumstances, the usual minimum is 30% of the loan amount, though this can be reduced to 20% or sometimes lower depending on the specifics of the deal. In general, if the private bank can see that there is strong potential for further development to the asset management side of the relationship, they are more willing to be flexible.

 

Option two: Minimise interest costs

This is a private bank’s favourite type of lending. Here the loan is fully collateralised with cash assets managed by and pledged to the private bank. The client would place the property (for tax purposes only) as security, but in fact the property is not even required as this type of loan could be made without reference to a property at all. 

In a Lombard situation you would place assets with a lending value of 100% of the loan amount, bearing in mind that if these were equities, the nominal or “face value” of the equities might actually be as much as 200% of the loan amount.

Now that the bank feels fully safe in its lending and the loan does not affect its Tier 1 ratio for Basel 3, it is possible to access the keenest rates anywhere in the market. Private banks are in competition with each other to find new clients with investment assets, which is why FPF always shop around to see who is prepared to offer the best lending rates for the mortgage.

Typical rates will be a variable margin below 1%; on top of this will be management costs which are also likely to be less than 1%.

 

What is lending value, nominal value and lending value ratio (LVR)?

When someone is investing in property, we come across the lending value of the property, which is usually established by a surveyor. Buyers then usually get a loan against this value, up to the maximum the bank will accept in terms of loan to value (LTV). If a bank has a maximum LTV rate of 80%, they will lend €800,000 against a property valued at 1m€.

Private banks use a similar method when deciding how to lend against a portfolio of stocks, shares and bonds. This is called the lending value ratio or LVR. Depending on the types of investments in the portfolio, the bank will decide on the LVR. Cash, of course, is king. The more speculative the asset, they less weight it carries in the eyes of the private bank. A schedule of how most investment types are weighted by the banks is laid out below.

 

Investment Asset Class Lending Value

The nominal value, also called the face value, is what the client actually needs to transfer to the bank.

Of course, a private bank can survey the entire portfolio a client wishes to transfer or create with the bank and assign an LVR to each line. 

For example, the bank wants 1,000,000 € of assets under management (this is the lending value). If the client wants the bank’s mutual funds and the LVR is 80% (to follow the table above), it means that the nominal value is 1,250,000 € (1,000,000 / 0.80). 

A key question in finding the optimal relationship will be establishing the values each bank uses.

 

What fees are involved?

To be in a relationship with a private bank in the context of a property purchase, the fees are as follows:

Property valuation fee

Once you have selected the bank, the property will have to be valued. You can select a valuer from the panel agreed by the bank. N.B. Not all valuers are agreed by all banks and the bank will want to instruct the valuer – the bank will send you the invoice. Costs vary from 2,000 to 7,000 euros depending on the scope and size of property.

Bank fee

The bank will charge the client a fee of some kind to facilitate the opening of accounts and to set up the loan. These vary from bank to bank and may be called ‘arrangement fees’ or ‘account opening fees’. Depending on the relationship with the broker, the bank pays part of these fees to the broker. In FPF’s case, this will be made clear in the correspondence.

Broker fee

For assistance in finding the right bank to match the requirements of a client’s situation and to optimise the conditions, a fee will be charged that is appropriate to the work involved and the context. Typically, the total combined bank and broker fees for opening the account and setting up the loan are between 1% and 1.5% if the case is very complicated.

 

On going fees with the private bank

As discussed previously, the bank is keen to increase the assets under management and to actively help clients manage their investments.

 

There are two main types of contract or mandate you can give the bank to help manage these investments:

Discretionary mandate 

Gives the bank the ability to buy and sell when they deem appropriate. These follow a conservative, balanced or aggressive investment approach, according to an agreed risk profile. A mandate such as this has an average cost of 1%.

Advisory mandate

With this type of mandate the bank will provide advice and suggestions for when and what to buy and sell. This type of mandate can either have an all-in cost so you can trade as much as you like and might cost 1%, or it can be a lower ongoing charge plus costs per trade.

Other charges

There may be an administration charge annually for reporting and general management of the accounts. There will also be a custody charge for holding the assets to offset the costs of administration. Usually the range here is 0.1% to 0.3%. Custody and admin charges may be included in the cost for one of the mandates above. This becomes more relevant if a client wants, for example, 50% of the portfolio in custody only as a long-term hold and 50% under management in a mandate.

 

Property considerations

Existing property

Private banks usually assign a lending value ratio of 50 to 70% of the valuation report price of the property. This means that for existing property, things are quite straightforward. The property is surveyed, the value decided and the overall arrangement is agreed.

Off-plan and construction

When it comes to off-plan property, things become a little more complicated for the majority of banks as they are not comfortable lending on a property which is not yet built, under construction or undergoing heavy renovation.

The reason for this is that it is hard for the bank to establish the value of the property as there are additional risks attendant to construction. In such cases, the majority of private banks will ask for additional collateral during construction, preferring a full Lombard loan, secured purely against assets until such time as the property is completed, surveyed, valued, a mortgage registered and lending value ratio assigned so that you can switch to a mortgage loan on the property and reduce the amount of assets pledged to the bank.

 There are some options which do not require an initial Lombard loan which allow construction to be financed up to 100% LTV, with 30% LVR in Assets Under Management. 

 

Affordability criteria

In terms of affordability for the loan, a private bank can be more flexible than a retail bank. Providing the assets are there, an experienced broker such as FPF can usually find a way.

 

Why do some people get turned down for French mortgages?

Overdrafts

One of the top reasons why French banks will sometimes refuse an application is if the client runs their accounts with a negative balance. They can sometimes refuse even if there are sufficient savings elsewhere to clear the balance. This is a cultural issue as the French simply don’t operate like this and find it very hard to understand the use of overdrafts. The ability to generate income and save it is a key driver of their credit mentality and so, in their eyes, the use of overdrafts indicates a lack of ability to save and manage money. Getting a French bank to change its mind after refusing a case is a hard ask. That’s just the way it is (shrugs gallically).

 

Lack of clarity

There are no credit checks in France as such, so a French underwriter will check and trace all income and outgoings through to a satisfactory conclusion. All points require documentary evidence and there is not much desire to read between the lines. So income not being declared on a tax return, rental income being paid in cash, no payslips or tax returns can cause real issues with an application.

 

Lack of three-year picture

French banks find it difficult to take non-salary income into consideration if there is not a three-year track record. So bonuses from new jobs or first year company dividends are not enough of a track record for a bank to lend against. There can also be confusion when someone has sold their company and now has a very large amount of investments which generate enough income to support the loan – but lack a proven track record. Even though the assets are solid, a French retail bank will not be in a position to lend. For that particular case we could use a private bank as they have more flexible positions and are more interested in getting assets under management. Please see the private banking guide for further details.

 

Being based in the wrong place

French banks are most interested in the clarity and reliability of an applicant’s financial situation. So if you work for Coca Cola anywhere in the world it is quite likely we can find a loan – because the employing company is listed on a major stock exchange and is a global brand. Self-employed Europeans can often obtain mortgages in France, but self-employed people from outside Europe can find it very difficult – unless their financial profile is crystal clear, perhaps audited by a global name. Where tax returns are not available, income must be corroborated by a listed company.

 

Money fixes many problems

As mentioned above, a private bank can fix some problems related to a lacklustre paper trail but will always require more than €500k to be placed with them (so that it can be managed/invested) and usually more than €1M.

You can read more in our private banking guide here.

Deposit funds are borrowed or come from a company

This issue comes from the drive for more responsible lending and the cultural focus on having enough savings. Releasing equity from your house to finance a deposit for a French mortgage is a no-no, unless it takes place a sufficient amount of time in advance (i.e. a 4-5 months). The same goes for withdrawing funds from your company. It is possible sometimes to draw an extra dividend to help with a mortgage, but again it is best to do it in advance and to keep to the same pattern. Banks like regularity.

 

Lack of funds after the purchase

Over the years banks build up experience and adjust their credit policy according to how the default rates are looking. Early on they noticed that if they allowed someone to put every last penny into a property, then soon after they ended up missing mortgage payments. The rule is here to have some rainy day funds left over after the purchase, 12 months’ payments or €20k is probably a good guide.

 

The wrong property

A bit harsh here, but French banks are always looking at the security of the property and their ability to sell it quickly if they have to call in the loan. Therefore illiquid properties – ones that will take a long time to sell because there is not really much of a market for them – can be difficult to finance, even at 50% LTV. These include properties like chateaux – everyone loves a castle but not too many actual buyers – gites, which can be considered too commercial with a limited number of buyers and fishing lakes, which may well be the pipe dream of many but it is not one that the banks feel confident about financing. The exception is when the overall picture is one of a house plus a lake, rather than a business.

 

GFA – for off-plan property

This issue can come from the blind side. When buying an off-plan property it is worth checking if the developer has his Garantie financiere d’achevement (financial guarantee of completion). Without this, banks will not finance the development. It is important to note that this guarantee must be from a French institution as we had some from Gibraltar which were not accepted by the lenders – which caused significant delays.

 

Bank unit allocation

In large off-plan developments we can sometimes reach a stage where a bank has already financed the allotted number of properties they are prepared to offer mortgages for and they aren’t prepared to expose themselves to any more risk in that development. This total can range from three units for some banks to 10% of the development for others. This is only an issue when a client finds a specific bank with a loan that works for them – only to find that the bank has completed its allocation.

 

Political and professional exposure

French banks are sensitive to political exposure, so diplomats and government officials can find it difficult to obtain loans. This can also be an issue for people who work for the UN, for example, where they have a contract which states that they cannot be prosecuted – which is problem some lenders are not interested in dealing with, so they refuse the loan. Also some large accounting firms have a long list of banks they cannot work with as part of their professional contracts.

 

Not possible to obtain insurance

If life assurance is required but existing medical conditions or age mean that the insurance premium is too high or no insurance is available, then this can be a reason for refusal.

 

Income taxed in the US

Due to FATCA reporting requirements many French banks cannot be bothered to deal with US tax payers. We do have some solutions, but they are few and far between.

 

Equity release mortgages in France

Currently, French equity release mortgages are not widely available from French retail banks. There is a certain logic which runs through the French property and finance markets which is that you buy a property with a mortgage, you keep the same mortgage to the end when it is paid off – and that’s it. Even refinancing/remortgaging is a little frowned upon.

However, once we get to properties and transactions running in the millions, then the private banks can be more amenable to a clients’ specific needs as they see a mortgage as a means to begin new relationships. However, there are still restrictions and it is far easier to release equity if there is some form of refinance involved, either from a shareholder loan or a previous mortgage on the property.

Many people will have bought property in France over the last decade and seen the price of their property soar by large percentages. For those who bought properties in France by releasing equity in the UK, the gains will be magnified by the current low trading value of sterling.

 

Restrictions on use of funds

Acceptable projects for the funds released from your French property. French banks prefer to release funds for the following reasons:

– To pay off existing mortgages/loans

– To purchase new properties

– To improve existing properties

– To purchase high ticket items

– To create financial assets to be managed by the bank releasing the equity

 

What are the main tax considerations?

Income tax

As of 2019, there is a basic rate of 30% of the net rental income to be deducted in France and the rental income should be declared in your home country. For this reason, many people who intend to rent their property out consider doing this via a company structure. This has various advantages in relation to inheritance tax and reducing income tax payable on the rental income.

 

Capital Gains Tax

For property owned personally, when it comes to Capital Gains Tax in France the basic rate is 19% – to which we have to add 17.2% for social charges. An additional rate of 6% is added for gains over €250k. This tax can be mitigated through the use of an SCI, SARL de famille or SNC. FPF can introduce clients to a suitable professional who can advise on the intricacies of such matters.

 

Property tax

Tax foncière and Tax d’habitation (two separate taxes) will be levied on your French property annually. These are usually calculated on a per-square-metre basis and the figures will be available from the agent selling the property.

 

Property Wealth Tax (IFI)

French Wealth tax – “Impot sur la fortune immobilière” – is an annual tax that is based on the net value of real estate held in France only. The calculation is based on the price the seller could be expected to achieve if the property was on the open market and sold as at 1 January in the year in question. From this value, any loans used for the initial purchase of the property or subsequent loans for renovation can be deducted. Tax is then due on the balance and is applied as below. The calculation only starts if you have net real estate assets over 1.3m euros.

– 800,000: 0%

– 800,000 to 1,300,000: 0.50%

– 1,300,000 to 2,570,000: 0.70%

– 2,570,000 to 5,000,000: 1.00%

– 5,000,000 to 10,000,000: 1.25%

– 10,000,000+: 1.50%

 

Inheritance tax in France

Real estate in France is subject to French inheritance tax but, thankfully, not the laws of succession for most countries with a double taxation treaty. French company structures offer the ability to transfer gifts during your lifetime. For specific advice please contact us to connect you to a specialist.

 

Common structures for tax optimisation

We see many people choosing to use a corporate structure to optimise the tax situation relating to their ownership of a property in France.

A big caveat before reading the information below is to say that this is just an overview of what we see, and what we understand to be the reasons for the choices buyers make. We are not in a position to give individual tax advice, so please don’t rely on any of this information; instead seek advice from qualified professionals (we can help make connections if required).

Own name

Whilst holding the property in your own name is very tax efficient in France, it can be difficult to transfer shares of the property to children. If you plan to rent the property out then it is likely there will be no income tax in France, though the income will be taxed in the UK. You may be able to structure the purchase under the UKs ‘furnished holiday let’ rules – but this has to be checked carefully.

Unfurnished rental or optimised family home

Usually in cases like this, we might see an SCI used – it is a type of private limited company that can be set up in France. It is transparent for French tax purposes and opaque for UK tax purposes, so if a property is rented the income is sheltered in France where there is little tax to pay on the income as you can deduct the interest on the loan and a portion of the value of the property. Shares in the SCI can be transmitted to children.

Furnished, seasonal let and family home

For furnished rentals we see the SARL de famille being used – this structure is for close family members only. It is transparent for French tax so owners can use their personal tax allowances, but opaque for UK tax so the income is not subject to tax until the funds are repatriated to the UK. The shares in the company are transferable so inheritance tax can be mitigated.

 

Purchase and refinance costs are as follows

 

MORTGAGE REGISTRATION TAX

(cost on the mortgage amount)

Loan amount OFF-PLAN EXISTING
100,000 1.66% 0.81%
150,000 1.52% 0.67%
200,000 1.46% 0.60%
250,000 1.41% 0.56%
300,000 1.39% 0.53%
350,000 1.37% 0.51%
400,000 1.35% 0.49%
450,000 1.34% 0.48%
500,000 1.33% 0.47%
600,000 1.32% 0.46%
700,000 1.31% 0.45%
800,000 1.32% 0.44%
900,000 1.29% 0.44%
1,000,000 1.30% 0.43%
1,500,000 1.28% 0.42%
2,000,000 1.27% 0.41%
2,500,000 1.26% 0.41%
3,000,000 1.26% 0.40%

 

STAMP DUTY

(cost on the purchase price)

Purchase Price OFF-PLAN EXISTING
100,000 3.52% 8.85%
150,000 2.95% 8.20%
200,000 2.66% 7.88%
25,0000 2.65% 7.68%
300,000 2.38% 7.55%
350,000 2.29% 7.45%
400,000 2.23% 7.39%
450,000 2.18% 7.33%
500,000 2.15% 7.29%
600,000 2.09% 7.22%
700,000 2.05% 7.18%
800,000 2.02% 7.14%
900,000 2.00% 7.11%
1,000,000 1.98% 7.09%
1,500,000 1.92% 7.03%
2,000,000 1.89% 6.99%
2,500,000 1.87% ²²
3,000,000 1.86% 6.96%

 

What are the main risks when buying property in France?

Thinking it is like the UK, common misconceptions

One of the main risks to your personal equilibrium – and perhaps your pocket – is thinking that France is like the UK (or other home jurisdiction). It is not. The French have a particular way of working and a different frame of reference that most in the Anglo-Saxon world. Essentially, it is the only northern latin culture and unlike the south, where things can be a bit more laissez faire, there is an extreme rigor to the French bureaucracy. Rules are there to be followed.

Paperwork on another level

A newcomer must get used to the idea that all documents have to be sent and received in original, signed and initialled on all pages with no mistakes or crossings-out allowed. It is very unlikely that standard processes can be deviated from; all any applicant can really do is grin and bear it and submit to the decrees of the banks.

 

All loans are personal loans

The key risk with all loans is the risk of default. The main risk after default in terms of a property is negative equity and placing other assets at risk. If you default on your French mortgage loan payments for long enough, then after a lengthy period the French bank will call the loan in, present the case in court and obtain permission to sell the property. Once the property is sold, the loan will be cleared and the balance – if any – returned to you. If the property sells for less than the loan amount, it may be possible to do a deal with the bank in which they waive the balance… though they may try to pursue you in the UK for the balance. The reason they can choose the latter if they wish is that all mortgages are also personal loans, meaning they can pursue you personally. This is also the case for a loan made to a company. Because of this, it is usual for the borrowers to caution any hypothécaire or guarantors for the loan.

 

Refinancing a mortgage in France can be problematic

Because French banks know that they are able to repossess properties in the event of someone defaulting on their mortgage, they feel a certain confidence/security that enables them to offer such low long-term rates. This is great news for the buyer, and has shaped the whole French mortgage market in a generally positive way. However, in some cases people do wish to refinance a loan from time to time – they are usually seeking to improve on a loan fixed when rates were very high or they are addressing an interest-only loan which is expiring. The main issues are discussed in here and in our article about refinancing.

 

You buy a leaseback with guaranteed rental income

Getting a mortgage on a leaseback property in France used to be incredibly easy. The French banks used an affordability calculation which turned out to be far too generous and everyone got badly burned when the financial crisis hit both borrowers and leaseback management companies guaranteeing the rental income. Since then, the lending criteria for French banks has become more strict and rental income is only taken into account under certain circumstances, such as when the bank is trying to convince its compliance department that the applicant will be able to afford the loan (something that is especially pertinent when an application is not as strong as it could be in terms of debt-to-income ratio). Usually, though, the borrower has to be able to afford the French loan without requiring the rental income.

Leaseback properties – important details

When buying a leaseback property there are a few things to look out for. It is important to look at the track record of the management company, perhaps looking closely at their finances. Many French banks will not lend on properties where there is guaranteed rental income. Even in cases where the property is designated as a ‘residence de tourisme’ and benefitting from a reduction in purchase price due to the VAT rebate, some banks will choose not to finance where a single management company is responsible for the common areas of the building as they fear a dilapidation of the building over time, leading to a reduction in the value of their security.

 

Signing a purchase without a mortgage clause

The French property purchase system is very fair and equitable. You have your offer accepted and then a contract is signed which is not breakable so you can be sure to get the property you agreed to buy. You can even say that you will only buy on condition of being able to get the requisite finance. All very safe indeed. However, in fast-moving markets like Paris you can be convinced to sign without a mortgage clause in order to secure the property. This is fine – providing you go into it with your eyes open and preferably have the funds to buy in cash, or you leave ample time before completion to get the mortgage (ideally 6 months) to bring the risk right down.

 

Post-finance (after you’ve purchased a property in cash)

A post-finance mortgage is one that you take out after having already made the purchase in cash, and this is certainly possible in France, but it is well worth getting a decision in principle first before relying on it. Generally, you can get the same conditions as for a purchase regular mortgage, providing you apply within six months of purchase. One issue with post-finance for new builds can be that somebody builds a property with cash but does not get all the requisite permissions, including ‘assurance dommages ouvrages’ (10-year insurance on the building works), which a French bank would require. Without this, the property is unable to be sold.

 

Exchange rate risk

Currency fluctuations are something all potential French home-owners should consider. If sterling, for example, were to fall further, then financing monthly mortgage payments in Euros exchanged from UK earnings would become more expensive. Likewise, when it comes to selling, currency rates present another potential problem. If you bought for cash at 100,000 euros when that equated to £90,000 and then sold at a later date when 100,000 was suddenly worth £70,000, you’d be worse off. 

It is generally accepted that it is safer to have your exchange rate risk based on the monthly mortgage payment than the value of the entire property. For example, it would be better to pay 20% more for your mortgage payments 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, if you receive rental income in Euros then it makes sense to have a loan that is also paid in Euros, which lessens any exchange rate risk.

In the current climate where the Euro is historically strong (August 2019), it is worth considering a 100% French mortgage in euros, if available, to reduce the requirement to transfer funds to Euros until the exchange rate moves in your favour – although this is, of course, a speculative move as rates go up and down.

 

Change of rate at the last minute

Finally, a note on the risk of a lending rate changing once the mortgage application gets to the committee stage. No one likes it when this happens, but it can and it does. In 90% of cases the bank would impose no change to the rate, but if there are some risky elements or something unusual – or perhaps we are in a rising rate environment – the committee may increase the rate to maintain profitability on the loan for the bank. 

 

What are some of the hidden advantages of buying property in France?

Overview

Contrary to popular belief, France is an extremely attractive place to invest in real estate. Whilst the property values don’t usually soar up, up and away,  you can usually rely on steady growth in the value of the property and a very advantageous tax situation. Combine this with the certainty of long-term, ultra-low French mortgage interest rates in the most visited country in the world and we have a recipe for a great investment that you can enjoy with friends and family. Sales pitch over!

 

The tax situation is favourable

In France it is the norm for a real estate investment to attract little or no tax in France for up to 20 years. Of course, you have to use an accountant to ensure your tax affairs are done by the book, but this is fairly standard in most countries. It is even possible to arrange it so that you will have no tax on the rental income in your home country.

You can read more about the tax situation in our guide to French property taxes.

 

Long-Term Fixed Mortgage Interest Rates

If you have been diligently reading the entire guide you will not be new to this concept, but for those who came straight here, let’s just look at it again. In France it is possible to fix your mortgage interest rate for 20 years. Yes: 20 years. Fixed for the duration. Some people fix at a rate of 1.5% for 20 years. This is simply not possible in the UK.

 

Same rates for second homes and buy-to-lets

Whilst there might not be a whole lot available in France when it comes to interest-only mortgages, if you can get one you can fix the rate for many years, pay almost no tax – and if you put down a 40% deposit, you probably won’t have anything to pay for almost 15 years as the mortgage payments should be covered by money you earn from renting it out

Buy-to-let mortgages in France are available at very attractive rates compared to those of neighbouring countries. However, an important point to note is that, unlike the UK and many other countries, French banks will always look deeply at the borrower’s financial situation and will be less swayed by the future potential rental income of the property. 

The general rule of thumb for buy-to-let investing is to seek a loan on an interest-only basis to lower the monthly cost and to wait for the market to rise, then to release equity and continue to build the portfolio. However, owing to the lack of interest-only mortgages in France and the reticence of French banks to refinance interest-only mortgages, the more typical way of buying in France is to commit to a long-term hold on a repayment basis. This way, you get to enjoy the benefits of selling when the mortgage is completed or profit from the unencumbered rental income once the mortgage is paid off.

One caveat to the above is that there is more flexibility than ever when dealing with a private bank – so if the goal for a client is, say, to add value to a property and refinance, then a private bank may be a better partner – though there will be additional capital requirements in order to facilitate the expected wider relationship with the bank.

 

Low early repayment charges

To add a cherry sur le gateau, French banks can only charge six-months’ interest on any sums you pay back early on the long-term fixed rate. So if you had a 2% fixed rate and wanted to clear 100k, you would just pay 1k in penalties.

 

French Mortgage FAQs

Borrower

How much can I borrow?

Most banks will lend 70% – 80% of the purchase price, with some lending 100%, excluding the purchase costs.
Currently, all mortgages are status mortgages, meaning that the decision about whether or not to lend will be based on your personal status, so the banks will diligently look at your income and outgoings. Banks will allow you to spend up to a third of your gross monthly income (less any existing monthly repayments) on loans. They will also take a proportion of existing and future rental into consideration.

Can I borrow if I am self-employed?

Yes. There are several ways to present the information to the bank – your consultant will find the best option for you. Please see the required documents for self-employed borrowers and contact us with any queries.
Check the list of required documents to apply for a French mortgage

 

Costs and Fees

What are the fees involved in getting a French Mortgage?

The bank will charge a set-up fee: our lending panel ranges from 0.3% to 1% of the loan amount. This is payable at the signature of the deed of sale.

The broker fees: we charge a success fee of 1% of the loan amount. This is payable at the signature of the deed of sale.

There are also the notary fees: this is the equivalent of the stamp duty. It is about 2% of the purchase price for new build properties or about 7% for existing properties. This is payable at the signature of the deed of sale.

There is also “frais de garantie”, a mortgage registration tax: there are two types of guarantees: privilege de preteur de denier (PPD) and hypotheque. PPD (circa 0.5%) applies to existing properties and hypotheque (circa 1.5%) to new build.

All the costs above are laid out in our Mortgage Information sheet – which you receive with your purchase guide from French Private Finance.

Why do you sometimes charge a brokerage fee?

Some banks actually pay us a success fee high enough to waive our own brokerage fee. However most regional banks do not pay us anything or a tiny amount compared to the work done so we need to charge a fee. Any fee will be properly displayed in the purchase guides and the Key Fact Illustration.

What are the early repayment penalties?

With a fixed-rate loan, the repayment penalty will be no more than 3% of the amount you are paying off early 6 months interest on the amount you pay off. FOr example, with a rate of 2%, should you repay 100,000 €, the penalty would be 100,000 x1% = 1,000 €.

There are generally no repayment penalties for variable rate loans. 

Please check this on your mortgage offer.

 

Currency

Using a bank or a foreign exchange broker

Not everyone is aware that there are alternatives to using a bank when it comes to making international payments; by using a specialist foreign exchange broker, you could save time and money.

Unlike banks, currency brokers operate specifically to help you transfer your money and this means they can focus on securing you a better exchange rate and providing service to meet your individual needs. The benefits offered by each currency broker vary, but typically you’ll get:

• Better exchange rates
• Low or no transfer fees
• Faster transfers
• Better customer service

 

Market

What are the advantages of a French loan?

In general, the rates are 1-2% lower than comparable UK rates, and the interest on French loans is tax deductible. For investment purposes, it is better that the exchange rate risk from sterling to Euro is on the monthly repayment, rather than the whole value of the property. Also French loans offer very good long-term fixed rates that provide security at lower costs.

 

Has there been a change in the lending attitude of banks in France recently? 

Yes, banks are becoming more cautious with lending, particularly the BPCE group. We have had partners adding minimum income requirements, withdrawing from the non-resident market and also putting applications on hold for UK clients. 

 

The mortgage requires a collateral fund. What is it?

The collateral is assets placed under management at the bank. It will be invested in various funds including stocks, bonds and fixed term deposits. The actual asset allocation will depend on your risk profile. Together with your adviser, you can choose from a range of securities such as: 

– IE00B3XXRP09 Vanguard SP 500 UCITS

– FR0007063177 LYXOR NASDAQ-100 UCITS

– LU0616240585 AMUNDI BOND EURO AGGREGATE

The collateral is locked until the mortgage is paid off but can be reduced so long as the initial collateral to mortgage ratio is maintained. 

 

Process

Why do the banks require so many documents?

French banks dont have the Credit Check system so to get through the compliance and risk committees, they need to manually check your income documents (tax returns for example) or bank statements of any kinds to check if there is no other debt and see how you manage your debt & expenses

What is the French mortgage application process?

The process of receiving an offer can take anywhere from a few weeks to three or four months – depending on when you produce your documentation and how quickly we can achieve final approval from the bank.
Once you have decided on your French mortgage, you will need to send us the required supporting documentation. When the bank has a complete file, they will send you a final simulation, before sending the file to their lending committee for approval. If all goes to plan, a loan offer will be made.
Upon receiving the offer, you must wait a minimum of 10 days before accepting it (or rejecting it) – “a cooling-off period”. You have one month to accept the offer. After you have done so, the offer is valid for up to eight months, depending on the bank. You must complete the purchase of your property during this period. Extensions can be obtained in certain circumstances.

How long does it take to get a mortgage in France approved generally?

To get an agreement in principle, it is fairly fast (within a few days). But if we are talking about the application officially approved by the compliance and risk committees, it takes about 4 months.

 

Property type

What are the payment options during the construction of a property?

Most banks will offer the opportunity for you to pay interest only on the sums drawn down by the developer during the construction. During this period the borrower will still pay life insurance. This period can last up to 36 months. Full payments can be deferred until 100% of the mortgage funds are released.

 

Current Mortgage Rates in France

What are the current French Mortgage rates?

For an interest only loans, you can expect a rate of 2.35% fixed on 14 years

For a repayment loan, we can look at 1.65% fixed on 20 years at 70% LTV or 2.25% on 20 years at 85% LTV.

Variable rates are available with some banks and generally follow the Euribor 3 months + a margin. However maybe banks dont offer it anymore due to the low fixed rates.

What is the Euribor?

The Euro Interbank Offered Rate is the rate at which French banks and institutions lend money to each other. The EURIBOR is usually the base rate at the time plus a margin. Most French banks with a variable rate base their rate on the Euribor 3 month, plus their margin.
Check online at the Euribor- European Banking Federation.

How can I secure the rate?

In order to secure the rate that you have been told, it is necessary to send us all the required documents for the loan application. Upon receipt we can forward them to the bank that day, and reserve the rate for you. Rates can change twice per month, so speed is essential.

Why is my rate different than my friend’s?

Most lenders work on a regional basis, we have partnerships in place for prime locations: Riviera, Alps & Paris. Because of the area you are looking at we only have one option. 

If we have a larger deposit, can we achieve a better interest rate? 

Not necessarily but it can help negotiating. 

What is the TAEG (Taux Annuel Effectif Global)?

The TEAG is the French equivalent of the APRC in the UK: annual percentage rate of charge. It includes the following costs (numbers are for the example):

+ Mortgage tax: €53,058.30

+ Collateral guarantee: €255

+ Life insurance: €117,600

+ Bank fees: €25,000

+ Broker fees: €29,400

+ Total interest: €555,176.80

Total mortgage cost = €780,490.10

+ Capital = €3,920,000

Total repayment = €4,700,490.10

The APRC calculation is a bit complex so you’d need to use excel to find it. The formula is =RATE(240,- 4700490.10/240,3920000) which gives a rate of 0.16% per month when rounded to the second decimal point. Simply multiply by 12 to get the annual rate of 1.92%. 

 

Taxes

Should I take a mortgage or pay the Wealth Property Tax?

The TAEG (French equivalent of the APRC in the UK)  can be misleading and another way to look at the overall cost of your mortgage would be: 780,490.10 / 3,920,000 / 20 = 1%. If you subtract your average wealth tax rate pa, the real cost of borrowing is effectively cheaper. So borrowing can make sense. French Private Finance does not advise on wealth tax. Please check with a qualified accountant.

What is non-resident income tax?

Income tax liability of 25% is charged for French non-residents who are members of the EU. This liability can be offset against:

– Purchase costs

– Furniture

– Loan Interest

– 80% of the value of the property

It should be possible to avoid paying any French income tax over a period of 20 years as a non-resident – depending on how the purchase is structured.

 

5 Boring French Mortgage Tips

For French mortgage hunters looking to buy that dream French property, here are five top French mortgage tips to consider when looking to acquire finance in France.

1) Prepare to show ‘rainy day’ funds
Just like in the UK, there are additional buying costs on top of the deposit capital you are putting into the property. French banks will also want you to demonstrate that there is a buffer after this i.e. ‘rainy day’ funds, so that if anything unexpected happens the bank knows you have the means to handle it.

2) Understand eligibility criteria
French banks are keen to lend to overseas buyers provided they meet their lending criteria. However, French banks do not have access to credit scoring data – which means applications are assessed on proof of income. Three years’ tax returns and three months’ proof of income are required for employed people, with three years’ accounts required for the self-employed.

3) Get professional advice
One of the main reasons French mortgage rates are so low is that the banks are competing heavily for buyers. As a result, an international broker specialising in French mortgages for non-residents will be able to offer products which are better than if a buyer was to go direct – and at no extra cost.

4) Be confident of rental returns
For leaseback properties and also standard buy-to-let properties, make sure you are confident of the returns, especially if you are factoring these into your mortgage payments. For leaseback properties, banks take the projected returns into account when considering the application, but you also need to be confident of the property’s ability to generate the rental income you need.

5) Understand the system
The French mortgage system is more regulated than in the UK, but this is what makes it so secure and is part of the reason why the banks can offer such low rates over such long terms. Of course, this can sometimes mean the application process takes a bit longer, but in the end it will be worth it.

 

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