A Summary Of The Various French Mortgages Available And The Costs Of Establishing The Loan
- YOUR FRENCH PROPERTY IS AT RISK IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR OTHER LOANS SECURED ON IT.
- THE STERLING EQUIVALENT OF YOUR LIABILITY UNDER A FOREIGN CURRENCY MORTGAGE MAY BE INCREASED BY EXCHANGE RATE MOVEMENTS.
- CHARLES HAMER FINANCIAL SERVICES ARE AUTHORISED AND REGULATED BY THE FINANCIAL CONDUCT AUTHORITY. FRENCH MORTGAGES ARE REGULATED BY THE FINANCIAL CONDUCT AUTHORITY
The application of credit ratios
As you are probably aware, UK lending authorities tend to use an income multiplier to calculate the maximum loan available. French sources prefer to make sure that the monthly repayments of the mortgage do not exceed a given percentage of your monthly income (credit ratio).
These credit ratios can vary considerably from bank to bank but generally require that the combined monthly outgoings to service existing rent/mortgage loan repayments and those of the proposed French mortgage do not exceed approximately 30-45% of the relevant monthly income. As a very approximate guideline this credit ratio is equivalent to between 2.5x to 5x of total combined household income.
The amount of loan achievable
The advance is restricted by the valuation of the property. In the case of a purchase there are four main costs to consider:
- Purchase price
- French Estate Agents commission
- Notaire fees (conveyance and duties payable via the notaire)
- Essential repairs or renovation (French bank financing of renovation is discussed in a later section)
The standard lending criteria enables a bank to advance between 80% and 85% of the purchase price and the estate agent's commission. In additin, up to 85% of renovation costs can also be raised depending on the bank's opinion of the final property value.
Term and method of repayment
French banks do offer 'interest-only' mortgages, however, in general French mortgages are classic capital and interest repayment mortgages with monthly payments of capital and interest being directly debited from a French bank account. The amount of interest is calculated against the reducing monthly capital balance.
The maximum mortgage term is 30 years, but in most cases will be 15 - 25 years.
In some cases, life assurance assigned to the lender is compulsory. Depending on the bank, this life assurance will be arranged by the bank's associated life assurance company by means of a flat premium group policy for all their borrowers, or it will be left to the borrower to organise a suitable external policy.
Normally, where the life assurance is arranged by the French lender , the monthly life premiums are included in the monthly payments quoted in the mortgage offer. The borrower is usually assured for either 50% or 100% of the loan amount in accordance with the significance of their contribution to the mortgage payment. Life premiums differ according to the lender. The policy is not independent of the mortgage and is not owned by the borrower and will lapse upon redemption of the loan.
Alternatively, certain banks allow the life assurance to be arranged individually. The policy is then owned by the borrower and their estate. During the course of the term of the mortgage the policy is assigned to the lender, with proceeds automatically credited against the mortgage balance, and any excess returned to the policyholder or their estate, in the event of a successful claim. Premiums are paid out of the borrower's account separately from the mortgage payment. The policy is therefore independent of the mortgage. When the life policy is arranged in sterling, an allowance for foreign currency exchange risk is usually required. Consequently, most lenders allowing such life assurance arrangements will require the sum assured to be for 100%-120% of the initial loan amount. As with all individual life policies, premiums and rates will be determined by age, sex, the loan term, health and habits. Although the borrower is free to choose the life company with whom a life policy is taken, the company must be approved by the French lender. Policies already assigned to other parties are not acceptable.
ANY LIFE ASSURANCE POLICY PROVIDED IN THE UK IS REGULATED BY THE FCA
Charge rates of interest are generally lower for larger loans and when the level of personal contribution is greater than 30% of the purchase price. Please refer to the mortgage calculator page or contact our French mortgage broker for a breakdown of current interest rates available.
FRENCH MORTGAGE INTEREST RATE TYPE
(Characteristics of fixed, capped and variable rate mortgages)
The standard method of repayment of a French mortgage is via monthly instalments of capital and interest. This means that during the loan term the balance of capital owed reduces to nil. There are two basic methods of charging interest: fixed and variable rates, the latter including a wide range of schemes.
The fixed interest rate mortgage
As the name implies, the rate of interest charged remains the same throughout the term of the loan. Therefore, if general interest rates rise, you are not affected, and the amount of capital paid back in each monthly payment is not altered.
- The amount of your monthly repayment in EUROS remains fixed throughout the mortgage term.
- This means that in real terms, subject to currency fluctuation, the burden of these payments will fall during the course of the loan.
- Budgeting is made simple. If you are planning to let out the property, a fixed interest rate makes forward business planning easier with less need for contingency plans against rising payment due to rising interest rates.
- A fixed interest rate therefore offers security against future increases in interest rates.
- Since interest rates are fixed, whilst there is protection against rising interest rates, profit cannot be made from any fall in rates.
- Often an early redemption penalty is applicable, however we have access to some lenders who do not charge an early redemption penalty with their fixed rate mortgage. In the case of penalties if the loan capital is redeemed early, the penalty will be equal to 3% of the capital outstanding on the day the repayment is made. For partial redemptions, the penalty will be equal to 6 month's interest on the amount redeemed, subject to a maximum of 3% of the total balance outstanding prior to the partial redemption. Some schemes do however offer the borrower the option of increasing monthly payments from the 3rd year, without penalty. This therefore offers a penalty free way of paying off the mortgage early, whilst still benefiting from a fixed interest rate.
Example of partial redemption:
|Interest rate:||5.6% P.A. balance prior to redemption : 300 000 Euros|
|Partial redemption amount:||100 000 Euros|
|Redemption penalty =||100 000 x 5.6% P.A. / 2 = 2 800 Euros|
|Redemption penalty =||2.8%|
The variable interest rate mortgage
Whilst the characteristics of a fixed interest rate mortgage are broadly the same with all French lenders, the behavioural characteristics of variable rate loans will differ amongst banks. There are however four general types:
EURIBOR - Money Market Linked interest rates
The charge rate of interest is reviewed on each anniversary date of the loan, or sometimes every quarter, depending on whether the loan is linked to 3 month or 12 month EURIBOR. The new rate charged will be a fixed margin above the average EURO Interbank Offer Rate in Paris, in the months running up to the review.
Cap and Collar interest rates
Again the rate of interest is reviewed on each anniversary, and again the new rate charged will be a set margin above the base rate for the money market used as a reference by the bank. However during the course of the loan the allowable charge rate of interest will be capped to a maximum and collared to a minimum with any loss or profit incurred by the bank through not fully following market movements being absorbed by the lender.
Usually there are other minor constraints within this cap and collar scheme (e.g. if the subsequent new rate alters the old charge rate by less than 0.25% no change occurs). Generally the cap and collar are set at 1-2% above and below the original interest rate charged during the first year of the loan period.
Capped interest rate
The interest rate is reviewed annually, however from the outset the charge rate may not exceed a predetermined limit applicable throughout the loan term. The borrower can therefore have full advantage of any fall in market rates but with the security that during times of adversity the charge rate of interest will not exceed the maximum interest rate agreed at outset.
Capped increases in monthly payments
In this case, as with EURIBOR above, the interest rate is reviewed annually with the new rate being charged at a set margin above the reference rate. Although there is no limit put against the charge rate of interest, any increase in monthly payment is limited to the prevailing rate of inflation or a percentage thereof, irrespective of whether the actual interest rate increase demands a higher payment than this. E.g. if initial monthly payments are £100, (currency equivalent), and inflation for the year is 5% any increase in monthly payments for the following year will be limited to £5.00 (giving new payments of £105).
In order to account for the shortfall in payments that may arise as a consequence of this limit, the mortgage term can be extended. Once the payment has risen, it will not fall. Therefore if the interest rate falls back, more capital will be included in the monthly payments making for a faster repayment of the loan. This behaviour can result in the capital being naturally paid back earlier than the intended initial term, (without any early redemption penalty).
- With many schemes (but by no means all) it is possible to redeem the loan early without incurring a redemption penalty.
- If interest rates fall, in certain cases it is possible for the loan to naturally be repaid faster.
- There remains the possibility (in certain cases) of an early redemption penalty.
- Less stable repayment schedule.
- Possible losses from rising interest rates, (limited in the case of a cap or cap and collar mortgage).
COSTS INVOLVED WITH ARRANGING AND REGISTERING A FRENCH MORTGAGE
If you refer to the mortgage calculator page, you will see that included with each mortgage quotation, is a guideline of all French mortgage setting up costs, along with the Conveyance fees for the purchase. Taking into account the intended cash contribution on your part we can then illustrate the size of a mortgage needed to enable the purchase to go ahead, or show the maximum purchase price that can be achieved.
Bank arrangement fee
With the exception of only one or two banks, fees are based upon a charge of 1% of the mortgage amount usually limited to around 1.500 Euros inc. VAT at 19.6%. In certain cases this can be added to the loan amount or paid in instalments.
Registration of the mortgage deed
A charge, separate to the Frais d'Acte, is made via the notaire for registration of the mortgage deed. This cost will depend upon whether the mortgage is for purchase or renovation (in which case costs are higher), the size of the loan and whether a guarantor will be involved (e.g. in the case of purchase and mortgage taken out in the name of an SCI).
FRENCH MORTGAGES TO FINANCE RENOVATION AND REPAIRS
For properties needing essential repairs, or that lack basic modern amenities such as bathroom, septic tank, hot water, modern wiring, recognisable kitchen, French banks will often wish to know how such works will be financed. They are often willing to increase the overall mortgage amount in order to take account of these works.
The proportion of the loan geared to fund the work will be held back at the point of purchase - you will still need to make the standard personal contribution therefore to complete the purchase. Work funds will then normally be released upon presentation of builder's invoices. Depending upon the bank concerned, they may fully finance the first set of works, leaving you to finish financing additional works once the mortgage funds have been exhausted. Equally, it is often possible to agree to defer the capital element of the monthly mortgage repayment until the total mortgage has been released, thereby making payments lower whilst the work is in progress.