Repayment vs Interest only: Which offer should you choose?

Posted on 04 Nov 2020 in French Private Finance
Repayment vs Interest only: Which offer should you choose?

Repayment and interest only mortgage both have benefits, the choice of the product should be adapted to your financial needs and your profile. In France, the choice isn’t always possible, banks will usually prefer their clients to go for repayment loans. Why so? 

A quick explanation

Repayment products work this way: your monthly payment is made of interest and capital until the end of the duration of the mortgage (15 to 25 years). This means that your capital borrowed is being reduced every month until being cleared if you keep up your mortgage payments. On the other side, interest only consists in paying only the interest and repay the whole capital at the end of the duration (5-15 years). 

In France, rates are more commonly fixed for the whole duration of the loan. 

A matter of flexibility

In this field, interest only loans have a huge advantage in terms of treasury flexibility. Monthly payments are lower which generally gives you a positive cashflow when renting out your French property or simply have less financial charges to support. It is definitely the best solution when the monthly outgoings / cash balance are really what matter  to you.
However, if you want peace of mind, the advantage of the repayment mortgage is that you are reducing your debt over time and should you keep up with the monthly payments, your debt will be cleared at the end of the term without having to use your savings.

What about the costs?

If we look at the whole operation in its duration, we have to take into account French tax optimisation possibilities. In France, it is often possible to deduct interests from taxes (please read our guide for more information)

When you are going for an interest-only mortgage, the capital is repaid at the end of the duration, and the calculated interests are based on the whole capital until the end of the duration. If you are choosing a repayment mortgage, as its name says it all, the capital is repaid monthly, so the amount of interest due reduces every month. That means that over the same period of time, the amount of interest paid is higher with an interest only mortgage. 

From a tax point of view, as the amount of interests for interest only mortgages is higher, it should be possible to deduct more taxes yearly. But the tax advantage is clearly not enough to match the repayment mortgage costs in interests.

Another point in favor of the repayment mortgage is the French property wealth tax (IFI). French property wealth tax is supposedly based on the capital you own. If we keep this logic, you should not pay these taxes in the case of an interest only mortgage, right? Very wrong! The French parliament adopted a law which consists in accounting purchases through interest only loans as repayment loans. That means you still amortise your loan in the eyes of the French tax man. You may just end up paying property taxes while not even reducing your debt!

The clear winner here is the repayment mortgage. 

A matter of accessibility

In France, lenders require a much better profile for interest only buyers than repayment ones. It is not rare to see banks requiring the client to own other assets to protect themselves in the case of a credit default. For example, you need to show that you have 75% of the capital borrowed in NET assets excluding the equity in your main residence. It is important to know that the minimum mortgage amount for an interest only is 200,000 €.

Repayment mortgages require less obligations on that side as you just need to show that you have enough savings to pay for the deposit + fees. The minimum mortgage amount is 100,000 €.

Even Though interest only mortgages are quite a rare feature on the market in France, thanks to our 15 years experience, we can still find you the product you want.

As an ‘’encore’’, French Private Finance can provide a product that gives you the best of both world: the mixed mortgage.

The mixed mortgage is made of 2 loans of equal value:

  • One loan on Interest Only
  • One loan on Repayment

It gives you the monthly flexibility as the overall monthly payment is lower than a full repayment mortgage but it also gives you the security we all need as you reduce your debt over time.

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