New Products on the French Mortgage Market.

But is this a suitable strategy for you?

Where the product offered has no element of capital repayment the French bank is likely to require the borrower to take out a life assurance based investment contract known as an "ASSURANCE VIE". (The UK equivalent would be an offshore investment bond), with the aim of this paying off the mortgage at the end of the term.

A typical Investment Bond marketed in the UK is regulated by the FCA, (Financial Conduct Authority), giving the investor protection, within the UK, against financial loss arising from unsuitable advice surrounding the investment. The French Assurance-Vie IS NOT so regulated. Therefore you, the investor, have no future recourse for complaint to and recompense via the FCA and the Financial Ombudsman in the event that you believe you were misadvised by the French bank (or Broker). Rather, any complaint would need to be directed to the French regulatory authority. If you are UK tax resident, under the EC 3rd Life Assurance Directive, it is even possible that the bank or broker giving the investment advice is in breach of rules in proposing such an investment, unless he or the company he represents has notified the FCA of their intention to market the product to UK consumers . If the adviser is unable to provide copies of the policy conditions and explanatory "Key Facts" literature in English, it is almost certain that such notification has not taken place and the advice is being given either illegally or at best outside the scope of FCA protection.

The Assurance Vie is usually marketed and described to you as part of a tax efficient investment linked means of repaying the mortgage at the end of the mortgage term. This is to an extent true ONLY if you are intending to be FRENCH TAX RESIDENT by the time you cash in the bond. Nonetheless, even as a French resident tax is payable on profits at a rate which varies according to the period the investment has been held and the extent of the profits. Assuming an investment term of more than 8 years, profits generated will currently be taxed at: 13.5% for the first 4.600€ (for an individual investor), or 9.200€ (for joint investors) and 21% on the excess. If, however you, the investor, remain UK TAX RESIDENT, the profits or gains will be TAXABLE IN THE UK, (as opposed to France), at your marginal rate of UK Income Tax under a process known as top slicing. If, at the time of encashment you are already a higher rate taxpayer, your charge to tax on all profits will be between 40-60% depending on your level of other income at the time. Overall, the tax treatment is less favourable than that metered out to Endowment policies which are now no longer finding favour in the UK as a means of repaying the mortgage!

In summary the tax efficiency of the assurance vie product ultimately depends on where you are tax resident at the time of cashing in.

As with all investment linked mortgages, unlike the classic repayment route, there is no guarantee that the mortgage will be paid off at the end of the term. Instead success will depend entirely on investment performance - and on your tax position at the end of the term.

The rates of tax in the above example are correct for French tax year 2011 and UK tax year 20011/12. They are given for guidance purposes only and they may vary in the future with any changes in tax legislation.

"Guaranteed" Fund: "Fonds en Euros" / "Fonds avec Rendement Garanti"

It is possible you may be advised that your investment risk can be overcome by adopting a fund with guarantees. These are generically known as "Fonds en Euros" (Euro funds), or "Fonds de Rendement Garanti", (guaranteed return). Often the implication is that future returns are guaranteed at current rates. THIS IS NOT THE CASE. Like almost all investments, future returns will vary according to market conditions. The underlying investment fund is primarily, (75% to 90%), composed of long term Euro denominated Government and Corporate Bonds. The balance will be spread across equities, property, cash and short term loan contracts. Returns are therefore essentially linked to annual returns from those long term Bonds. Each year, the provider will announce an interim guaranteed minimum return for the forthcoming 12 months, to which they may add, at the end of that year, an additional return, depending on the extent to which: Actual returns have, (if at all), exceeded the interim guaranteed return. The provider wishes to withhold returns in reserve as a contingency against future losses or as a means of sustaining a consistent annual return in the future. The nature of these discretionary allocations of investment return, announced annually, bear comparison with the "With Profits" structure in the UK, with which you may already be familiar. There are, however, certain notable differences:

Terminal Bonuses are not a feature of the French contract
Market value adjustment factors, for the most part, do not apply at any stage, (one or two providers do however reserve this right).
UK With Profits Funds tend to have a larger proportion of the fund invested in equities and/or property, (which in theory, should result in higher returns in the long term, albeit subject to the increased investment volatility represented by the terminal bonus and market value adjustment features).

There are 2 basic long term guarantees:

A guarantee from the provider that the capital invested, (net of fees), plus the investment returns, once allocated, will be guaranteed, subject to their continued solvency.
A more general guarantee provided by an industry pooled investor compensation scheme, whereby 100% of capital invested, up to a maximum of 70.000€, is guaranteed by the scheme, in the event of provider bankruptcy.

The "rendement garanti" therefore applies to past allocated returns as opposed to future performance.

Most providers do not offer a contractual minimum return going forward beyond the current year, however, regulations do allow guaranteed minimum returns to be provided going forward, subject to the following limitations:

For contractual investment terms of 8 years or less: The lower of 4% or 75% of the Average Gilt Rate, ("Taux moyen des emprunts d′Etat / "TME").
For contractual investment terms of more than 8 Years: The lower of 3.5% or 60% of the TME.

With the TME currently at around 4%, this means that the current maximum guaranteed contractual return going forward cannot exceed 3% for the short term contracts or 2.4% for those with the longer term. Every now and then, according to prevailing conditions, even these limits may be adjusted by overriding regulations. The last such modification was in 1995, when the generally higher scheme guarantees issued on earlier contracts were scaled back. As such, even these low level guarantees are subject to future review and cannot therefore be relied upon in any calculations going forward.

Although there are occasions when tax planning might be well served by an interest only mortgage option, (Inheritance Tax, Wealth Tax, Income Tax when letting the property), in most cases an assurance-vie linked mortgage is unlikely to be a suitable route. If you have chosen a repayment mortgage route in the UK, you really need to answer the question as to: why is it appropriate to warrant taking on the risk of an investment linked, interest only mortgage on a property purchased abroad? Clearly, for a successful strategy you need to:

Take a view on what you see as a reasonable target rate of return for the level of investment risk you are prepared to undertake.
Take into account the likely tax treatment of any profits at the end of the mortgage term
On this basis, work out the initial amount to invest, (and the amount of any additional regular contributions, if relevant). Clearly, if a Rendement Garanti fund is chosen, typical returns are likely to be relatively low due to the nature of the underlying assets. Consequently, the amount of investment required will be correspondingly higher than in the case of a more dynamic, albeit volatile, investment strategy.
Achieve the target return.
- Is the target investment return a realistic proposition within the context of your approach to investment risk?
- If target returns are not achieved, you will have a shortfall at the end. Do you have the means to deal with this?
- To what extent would a shortfall erode any initial advantage in taking on the interest only mortgage in the first place?

Finally, you need to scrutinise any mortgage terms and conditions to establish the link between the mortgage and the investment:

Does the mortgage offer require the investment fund to reach a certain value at set stages during the mortgage term?
Will you have the cash readily available to invest in order to make up any shortfall in these targets?
What are the consequences for the mortgage in the event of not being able to meet these targets?

Remember, when linked to anything other than cash deposits, the value of your investment can go down as well as up!.

We are fully qualified Independent Financial Advisers, regulated by the FCA - therefore providing investor protection in the UK for advice given. We have specialist knowledge of the French and UK tax planning issues that give rise to the initial consideration of the interest only mortgage route as a planning option. We have access to other, possibly more appropriate planning solutions, (including interest only mortgages without the attached French Assurance-Vie arrangement running alongside). For more information contact either Javier de Diego, or Jonathan Pawsey.

For French mortgage quotations please go to the French Mortgage Calculator.

For up to date mortgage schemes and interest rates from a cross section of the market .
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At the foot of the page you will find links to our other financial services which includes :

Personal tax saving solutions.
French residency planning.
Help with your French Capital Gains Tax account on the sale of your French property
Help to complete your French income Tax declaration
Spanish mortgages

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