A guide to French mortgages and buying property
We delve into the business of securing a mortgage in France and deliver the basic facts about French mortgages and buying French property.
If you're tempted by property for sale in France, it can be beneficial to find out your French mortgage options as an expat, what tax rules apply if you're a resident or non-resident in France, and if you're eligible for any mortgage tax deductions. This guide to French mortgages explains ev
Should you buy property in France?
While several European housing markets have suffered severe fluctuations from the financial crisis, the French property market has emerged as one of Europe's core performing property markets, with considerable real estate investment in 2015 particularly in Paris. Other popular areas included the Alps, the Côte d’Azur, Aquitaine, Languedoc-Roussillon and Normandy.
For British expats in France, although the UK has indicated its intent to withdraw from the EU – providing both the British and EU economies with some degree of chaos – the actual exit process could take as long as two years to formalise. In the interim British expats should be unaffected, with the exception of the devaluation of the pound making French property more expensive. But the French have long welcomed foreign investment in their real estate markets, and some local authorities have called for France to offer British expats some sort of deal.
While some potential buyers may be motivated to pull back from the market, many French are becoming increasingly optimistic as property prices stablise. According to the 2016 real estate association FNAIM, 7 out of 10 French 'feel that the time is right to purchase real estate'. FNAIM experts estimate average property prices in France could decrease by 1–5 percent by the end of 2016, except in major cities where they will likely see price increases between 3 percent and 8 percent.
Foreigners, however, should be aware that property transaction fees total around 10–15 percent of the purchase price and capital gains tax applies if you sell the property (around 35–40 percent), factors particularly important for those planning stays of less than three to five years who might not be able to offset the costs in a short time.
How much can you borrow in France?
French banks are equally keen to write mortgages for foreign buyers as they are for French nationals – the same rules apply to each. The typical French mortgage allows a buyer to borrow between 70 percent and 80 percent of a property’s value, though some French mortgage brokers limit themselves to only 50 percent.
A peculiarity to French mortgages is the legal requirement that your entire liabilities – including rents, mortgages and other regular expenses – must be no more than 30 percent of your net household income (up to three cosigners). If your total mortgage term payments are more than 30 percent of your household income, French banks are prohibited from extending further credit. If a bank mistakenly does so, the borrower is not legally obligated to make his or her payments.
Thus, the amount which you can borrow in France is restricted by both by the property value and your net income. If you are over age 65, the banks will not include earned income – only passive income or retirement benefits will be considered.
You will also need to consider the transaction costs of buying a French property, which can add up to 10–15 percent for fees and expenses and the typically 20–30 percent not covered by French mortgages. To calculate, this means that if you purchase a property for EUR 100,000 and secure a 75 percent mortgage, you would need to provide personal funds of EUR 25,000 on top of some EUR 10,000–15,000 for fees and expenses. In total, you would need to provide EUR 40,000 in funds to secure a mortgage of EUR 75,000.
If you were to secure a EUR 100,000 mortgage at a 1.5 percent annual fixed rate for 10 years on 70% of the value. If your fees come to 12% of the property value, the mortgage will require that you provide €30,000 for the down payment, €12,000 for the fees, and – if you are a foreign investor – a bank deposit of at least €15,085. Thus the total cash you will need to have on hand to purchase your €100,000 property with a mortgage is €57,085. Your lender may be able to wrap the mortgage fees into the total disbursement, but again the mortgage is limited to 70% - 80% of the assessed property value.
A French mortgage calculator with an associated 'affordability' calculator can be found here.
Costs of getting a French mortgage
All mortgages in France have an associated set of administrative fees:
- There is a 1 percent origination fee, with a EUR 350 minimum (plus Value Added Tax, VAT).
- Lenders may require a 'valuation survey' which typically costs EUR 250.
- The largest cost of a getting a French mortgage are the legal fees, the frais de notaire, for the notary. These fees can total around 8–10 percent for a used property and 4–5 percent for a new build.
While French banks are happy to extend credit to foreign buyers following the same vetting standards and fee schedule as with nationals, they may place certain additional requirements on foreign buyers.
In order to get the best mortgage interest rates, and to secure against unforeseen currency exchange downturns, French mortgage providers may ask non-residents to open a savings account with a minimum deposit equal to at least 24 mortgage payments. For example, if you were to secure a EUR 100,000 mortgage with a 1.5 percent fixed rate for 10 years, you might be required to lock up capital of some EUR 15,000.
An additional, legal requirement for obtaining a French mortgage is to purchase a life insurance policy equal to 120 percent of your French mortgage with the lender named the beneficiary. The premiums are typically added to the monthly mortgage payments. Individual lenders may also require health and disability insurance policies, as well as that you submit to a medical exam if you are 50 years or older or borrowing more than EUR 150,000. Also, many lenders will request that the borrower obtain proof of insurance on the property and any improvements thereupon.
Tax considerations for French mortgages
There are three forms of mortgage-related tax relief allowed in France. One is the deductibility of mortgage interest on rental income; if you purchase a French property and rent it out for part or all of the year, your mortgage interest is considered to be a direct business expense against your rental income. Thus, for French nationals and expats with a valid residency visa, the tax on property revenues is calculated on the rental income less the interest payments. For non-residents, however, the tax liability on rental income is reduced to 25 percent of that levied against residents.
French law also allows mortgage interest deductions against French inheritance tax – which can be a sizable liability to those who inherit your property. The inheritance tax laws are complex and highly situational. Speaking to a qualified tax advisor is advisable as a precursor to buying French property or taking out a French mortgage.
The third form of mortgage-related tax relief applies only to those subject to French wealth tax. This tax is levied on non-residents only when their total French assets minus existing mortgage balances exceed EUR 3.1 million as calculated on 1 January every year. Thus, for those with significant assets, countering a French mortgage balance can provide tremendous savings in tax liabilities.
Before applying for a French mortgage
Before applying for a mortgage it is advisable to open a French savings account and make regular deposits, as this can be viewed favourably by the mortgage provider. As a foreign investor, the deposits made can also count toward any required minimum deposits, for example, proving savings equal to 24 mortgage payments. You may also want to speak with a financial advisor about purchasing a currency forward contract. Having one in place not only hedges against currency risk, but allows for more stable financial budgeting. Additionally, with the current historically low interest rates, remortgaging may also be a beneficial option, although a mortgage provider can advise you on this.
When applying for the mortgage, you will need to provide the following documents:
- Copies of the borrower(s) passports.
- Proof of income (including your last three pay stubs and last year’s tax return).
- Self-employed individuals will need to show a set of audited financials for three years.
- Bank statements for the last three months and proof of having funds for the costs of the mortgage, including the down payment.
- Current rental agreement (if that is your current accommodation).
- Statement of assets.
- Executed sales agreement (for the actual mortgage offer, not for a preliminary commitment).
- If appropriate, written estimates or invoices from French-registered tradesmen and copies of their certificate of insurance (if the property is new or to be renovated).
- If appropriate, a property title or preliminary sales agreement for the land, building license, and the building contract and plans (if new improvements are to be constructed on the property).
- If applicable, the title deed or loan deed with a complete repayment table if the property is to be financed with a remortgage or equity release.
French mortgages cannot be officially offered without presenting a property purchase agreement. But in some cases it may be possible to secure a certificate of commitment (pre-approval letter) for around EUR 350 (plus VAT) from a mortgage lender. This will usually allow you to negotiate with the seller and should be valid for three to four months. However, having a back-up mortgage provider is advised inasmuch as French lenders have been known to withdraw their mortgage offer and commitments at the last minute.
Before proceeding to secure an actual mortgage, the buyers will need to have the desired property’s value assessed and verified by the notary as being just and fair.
How to apply for a French mortgage
Applying for a French mortgage is relatively straight forward and a very similar process to other countries with well-developed mortgage industries. It can be worth consulting several mortgage lenders to see which one will give you the best mortgage interest rate. In France there are many local and international banks offering mortgages to foreigners, as well as specialised mortgage providers focused on providing expat mortgages and services.
As a buyer, you can request an official mortgage offer from the lender of your choice once a completed sales agreement has been signed by the seller and buyer, and the bank is assured the buyer can both afford the loan (per French standards) and the property’s value supports the loan request. Once accepted the mortgage will proceed to underwriting for final approval by the lending institution.
Types of French mortgages
There are several types of mortgages available in France.
One route to purchasing property is to remortgage an existing French property, if you have one. There are two types of remortgages: one allows you to borrow against the amount already paid against an existing mortgage, while the other allows you to borrow against a property’s increase in valuation. Before any remortgage can be secured, borrowers can visit a finacial lender or a notary to explain the various risks involved.
Taking out a mortgage on the property you wish to purchase opens up even more options as France has a well-establish mortgage industry.
A popular mortgage investors often take when purchasing a property with the intent of renting it out for part or all of the year, is an interest-only option. Since mortgage interest is deductible against rental income, this type of instrument greatly reduces the monthly outlay for the investor. In conjunction with the interest-only mortgage, the investor will also purchase an annuity which will pay off the loan principle at the fulfillment of the term.
Borrowers also have the option of choosing a fixed-rate or adjustable rate mortgage. Fixed rate mortgages are often set at a higher rate than available adjustable rate mortgages; but if the borrower believes rates will rise significantly over the term of the mortgage, the security of a fixed-rate begins to look attractive.
One fixed rate mortgage product that is very attractive is the so-called flexible mortgage. This product provides the security of a fixed interest rate, but allows borrowers to vary their monthly payments based on their individual cash flow circumstances. Typically the lender will set upper and lower payment limits, but in some circumstances payments can be suspended for up to two years or increased as much as 30 percent, providing a more rapid payoff.
Variable rate mortgages in France are keyed to the three month or one year Euribor rates plus a 1–3 percent margin.
A popular variation on the variable rate mortgage is the prêt à taux révisable non cape mais à échéances plafonnées. This produce has a completely variable rate, but the borrower’s payments have an upper bound. Though it is unlikely, it is theoretically possible that the borrower may inadvertently end up with an interest-only mortgage if the rates increase substantially.
Borrowers in France also have access to bridge loans – loans designed specifically for those who are ready to buy a property but who are waiting for the sale on their existing property to complete. Such loans are intended to be short term solutions, but can be extended for up to two years.
French Mortgage Guarantees
There are three types of French mortgage guarantees which foreign investors can consider.
Here the mortgage registration is taken care of by the notary who charges a fee around 2 percent to make sure all the sale documents are in proper order and properly recorded. The notary will also ensure that all the terms of the previous mortgage on the property are satisfied to clear the way for the new buyer’s mortgage, and that the requirements of the new mortgage are fully met.
This is the mortgage guarantee of choice by the French since the notary fees for this service are generally lower (only about 1 percent). It is very similar to the conventional guarantee except that the mortgage is given a first priority over all other claims on the property.
This is a relatively recent invention by the French banking industry aimed at reducing the borrowing costs associated with mortgages. The basic idea is that the risk of a mortgage default is shared among all participating lenders. Under the system, the mutual funder acts as the guarantor; in return the borrower pays the funder a guarantee fee proportional to the amount borrowed. The guarantee and arrangement fees typically come in around 2–2.5 percent.
Other peculiarities of French mortgages
Because of the amount of paperwork which must pass through the French notary, it is likely that the time frame from making an offer on a property to actually transferring title to the buyer will take up to four months. Plan your purchases and cash flow accordingly.
Also worth noting, real estate agents typically work for the seller. Buyers are therefore strongly urged to appoint and pay for their own notary to ensure that the sale contracts are equitable.
This information is provided as a guide only. If you need assistance in this area you are strongly advised to seek the help of a specialist in this field as each individual case is different.
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