Cash Buy, Sterling Remortgage or French Euro Mortgage?
AMOUNT OF CASH CONTRIBUTION AVAILABLE
With the maximum French mortgage advance being less than the full cost of the purchase, a cash contribution will be needed to cover the shortfall on the purchase price, notaire's fees and associated costs with setting up the mortgage and your deposit.
If the valuation of your main residence, and your financial status allows, 100% of the overall purchase price (and renovation costs, where applicable), can be raised in the UK, making the French project possible even if cash resources are limited or unavailable.
INTEREST RATES PRESENT AND FUTURE
With the ability to opt for a fixed interest rate for the duration of the loan term, either at outset or at a later date, the French mortgage offers greater interest rate stability. With the interest rate fixed the Euro payment due will never rise. Several variable rate schemes limit the extent that the interest rate can fluctuate. Even with a variable interest rate, interest rate change can be limited to annual reviews only and offer additional limits in movement via the cap and collar or capped schemes.
To remain competitive, fixed rate mortgages are usually restricted for a short period of between 2 and 5 years. Similarly, cap and collar interest rates schemes are usually short term. Although the option may exist to take up any further fixed or capped rate at the expiry of the initial scheme, the UK route does offer less interest rate stability than the French route.
COST TO ARRANGE/REDEEM THE LOAN
Whilst costs to arrange a French mortgage do not differ greatly in proportion to the loan amount no matter whether the mortgage represents 85% or 60% of the purchase price, nor whether the interest rate is fixed or variable, the cost to raise funds in the UK can vary significantly.
If there is no indemnity premium to pay, or a cashback incentive is involved, UK remortgage costs are likely to be lower than for a French raised loan. Generally, however the higher the percentage advance of the UK property valuation, the greater will be the UK mortgage arrangement fees involved.
Should you be considering raising finance in the UK, please contact our office for a quotation and comparison of the estimated arrangement fees compared with those of a French mortgage.
If the French property is sold before the end of the French mortgage term, a small fee will be incurred via the notaire to discharge the mortgage deed. Equally an early redemption penalty may apply especially if the French mortgage enjoys a fixed interest rate.
In the UK most redemption penalties, if any, apply during the period of any fixed rate, of for a set term in the case of cashback, loyalty bonus and discount rate mortgages.
Foreign currency exchange rate movements
Since the market prices of French property in general will be represented in Euros, the sale value of your French property at any one time will be determined in Euros. With your cash savings and income likely to be in sterling, the problems of foreign currency risk become apparent irrespective of whether or where a mortgage is raised:
If the value of the Euro falls in comparison to sterling the value of the French property when expressed in sterling will also fall, and vice-versa when the Euro appreciates against sterling.
The effect of foreign currency movement on the cost of borrowing and the value of any cash contribution is affected in 2 basic ways:
If the mortgage is in Euros, the most noticeable immediate effect of foreign currency exchange rate movements will be in the monthly transfer of sterling abroad to pay the mortgage. If the value of the Euro falls, sterling payments fall and vice-versa. Changes in the sterling monthly payment would also arise if interest rates changed. Fluctuations in the exchange rate affecting the sterling costs of a Euro mortgage can therefore be likened to an increase or decrease in interest rates. By ensuring the French mortgage interest rate is fixed, the currency risk associated with the French mortgage can then be compared to the interest rate risk of a variable rate or short term fixed rate UK mortgage. A long term appreciation in the Euro will have the same effect as a long term increase in the charge rate of interest as far as monthly payments are concerned. Please contact our office for an example illustration of this comparison.
Similarly, an alteration in the exchange rate will affect the sterling value of the French property, although this effect will only be felt if and when the property is sold. By having the debt (the mortgage) in the same currency in which the asset (the property), is represented (Euro) exposure to currency losses on sale is reduced. If a French property purchased for cash or by way of a sterling mortgage had to be sold and in the meantime the Euro had depreciated, the sale would generate a loss against the original amount invested, even if the Euro value of the property remained unaltered.
With a Euro loan, appreciation in the Euro would see an appreciation both of the value of the house and the outstanding mortgage when expressed in sterling. Subsequent sale of the house for the same Euro price would still realise profit however against the cash contribution made at the time of purchase.
Letting income generated from a French property is liable both to French and UK Income Tax. Whilst French loan interest can be offset against income both for French and UK tax purposes, it is less easy to do so for interest incurred on a loan raised in the UK. If you intend to let the property, the French mortgage therefore offers a distinct advantage over the UK based loan.
Property located in France is subject to French Inheritance Tax, with its net value being the amount against which the tax is calculated. The existence of a French mortgage secured against the property will subsequently reduce any French Inheritance Tax bill. In the case of a UK based loan, the property against which the mortgage is secured is located in the UK and therefore is not taken into account for French Tax purposes. As a result there is a risk of a higher French Inheritance tax bill with a UK based mortgage, during the mortgage term.
Liquidity of personal assets
Whilst it is comparatively easy to raise capital for almost any purpose against property already owned in the UK, such capital raising secured against French property is much more difficult - not generally being available. To recover personal capital, the French property would therefore need to be sold. This of course will take time, may realise a loss due to currency fluctuations, whilst the need for speedy disposal may also create a loss. A sale is also irrevocable - somewhat drastic if the need for cash is only short term.
A French mortgage at the date of purchase or for renovation would reduce the cash contribution needed from the UK, and leaving more readily realisable wealth located at home.
In almost all cases, life assurance is compulsory with a French mortgage, thereby adding to the cost of monthly payments. Most repayment mortgages and some interest only mortgages in the UK do not require life assurance as additional security, but this may be a personal necessity in any event. When life assurance is needed, the French block policy will generally be cheaper and more comprehensive, (also providing disability cover), than any basic UK counterpart.
The above areas are some of the considerations we recommend you should make prior to deciding upon your method of fund raising. In many cases our report to you will also include specific factors not raised here.
The degree of importance of each consideration will vary according to:
- Your intended use of the property (main or holiday residence to generate income).
- Your asset base and financial circumstances in the UK.
- The availability of a cash contribution.
- Your age and family status.
- The relationship and number of prospective French property owners.
- The loan term and whether you intend to redeem the loan early.
- Future intentions in the UK.
Overall, whilst both a French and UK loan have similar benefits against UK tax, a French loan is more useful in combatting French taxation.