- 1What are the main differences between a UK mortgage and a French one?
Mortgage types – Interest Only is now quite common in the UK but is rare in France, where Repayment Mortgages are predominant.
Duration – Whilst the average duration in France is around 15 years some lenders now offer up to 25 years. However this is still far from the maximum mortgage term in the UK.
Consumer protection – Stronger in France, giving rise to more formalism e.g. use of postal system for sending and returning offers and compulsory 10 day consideration period. It also makes lenders more demanding for their risk assessment, seeking more information and ruling out for example the possibility of self assessment mortgages, (see next question). However the positive side of this consumer protection allows buyers to recover their deposit if their mortgage application is refused.
Valuations or surveys – French lenders do not generally require full structural surveys as in the UK, although some lenders in France do arrange for valuations to be carried out for their own internal use.
That said – what do they have in common? At the end of the day we find the same principle of taking a legal charge on the property financed, and the fact that your home is at risk if you do not keep up repayments.
- 2How much can I borrow in France?
Rather than work on an income multiplier, most French lenders calculate financial commitments (loans and rent) including the requested mortgage, as a percentage of stable net pre-tax income (not gross income). As a general rule the ratio should not exceed one third, but obviously this depends on the figures involved as the higher the income the higher the debt ratio can be. In fact, most lenders try to apply their rules with common sense and look at the actual amount of disposable income, not just the percentage.
As for loan-to-value, the usual maximum in France for non-resident buyers is 70% with some specialised lenders going up to 85%.
- 3How should I finance my new French home? I know how a UK mortgage works but what are the advantages of a French mortgage?
In many instances acquiring a mortgage is a prime consideration when buying a property in France. You may think that organising your mortgage through your local bank may be the easiest option, but it is definitely worthwhile considering the advantages of a French mortgage before picking up the phone to your bank manager.
Although it might be slightly more lengthy to obtain and incurs a notary registration fee, a loan in euros presents several strong advantages:
Interest rates are generally lower than sterling rates and more stable, as they are influenced by the European Central Bank.
Using the French property as security preserves equity on customers’ home country assets. You can keep the equity in your UK home for a rainy day.
Borrowers are entitled to offset the mortgage interest in their French tax declaration when the property is let out. And rental income can be used to offset Euro mortgage payments thus circumventing exchange rate fluctuations for the monthly repayments.
Specialist lenders based in France are better placed to assist their clients throughout the purchasing process.
French consumer law provides greater protection for the borrower than UK law, for example, the cooling off period of ten days before accepting the mortgage offer.
Your assets ( French property) and liability ( euro mortgage) are matched in the same currency, avoiding the danger of negative equity if exchanges rates fluctuate. Evidently exchange rates can work both ways, but there is a real risk that if you take out a sterling loan the value of the property in France may end up not being sufficient to cover the sterling mortgage that you took out in the first place.
All these advantages make borrowing in euros for the French property a more feasible option than it has ever been.
- 4We are planning to buy a property in France and run a gîte business, but we wonder how does a bank decide how much they would lend?
Most lenders providing a dedicated service for non resident buyers in France only grant mortgages for residential properties (main or second homes). These may be used sometimes for holiday lettings but the underwriting is based on sustainable professional or retirement revenue rather than "gîte" income.
Raising finance to set up a "gîte" business in France is governed by different rules in both in terms of financial assessment and also consumer protection.
- The bank concerned would have to assess the viability of the business plan both in terms of the "gîte" location and also the applicants' experience (or lack of) in such activities. The percentage loan-to-value would also be a key factor and is unlikely to be as high as for residential mortgages.
- The loan if granted would probably be considered as a business loan to professionals and therefore would not be subject to the French consumer protection laws ("loi Scrivener") with for example the compulsory 10 day consideration period, even if you intend to live there. In this area professional advice from specialist lawyers and/or tax adviser is recommended, to help the applicants choose among different solutions for owner and professional status depending on their situation.
The applicants may still have the option to raise finance on their UK assets by using a sterling equity release mortgage, and find this quicker and easier. However two disadvantages of this are :
- a mismatch between the French euro based asset (the property) with its euro rental income on the one hand, and the sterling liability on the other.
- it may be difficult to claim relief for the UK interest payments in the French tax return which the "gîte" business would have to file.
Finally, as for which banks to approach, there is no simple answer but it would make sense to start with local banks close to where the "gîte" is situated.
BNP Paribas International Buyers specialise in financing residential properties only and do not currently finance properties which have or will have a commercial activity.
- 5How do I pay my mortgage?
The monthly payments of your mortgage will be debited from your French bank account.
In addition to your mortgage payments, you may have other costs in France such as utility bills or taxes.
To make your life easier, we have negotiated preferential conditions with a UK leading foreign currency provider to help you make regular transfers to France from your UK bank account.
This service is free of charge (no commission or transfer fees) and represents an average saving of £25 a month (the cost of an international transfer varies from £15 to £39 depending on your UK bank).
It will enable you to transfer every month a sum of money from any bank account in the UK to France. This sum will be debited in sterling from your account in the UK, converted into euros at a highly competitive exchange rate and transferred to your bank account in France.
When setting up this service, three options will be open to you for periods of at least six months:
- Option 1: Fix both the sterling amount to be debited and the euro amount to be received in France;
- Option 2: Fix the sterling amount that you send, with euros purchased monthly at the prevailing exchange rate;
- Option 3: Fix the euro amount that you receive in France with the equivalent sterling amount determined each month at the prevailing exchange rate.
Should you require any information on foreign exchange transactions and the conditions applicable thereto, please contact your mortgage adviser.
Frequently Asked Questions
Mortgages are subject to acceptation by BNP Paribas Personal Finance. For all mortgages the borrower has a 10 day reflection period. If the sale is subject to mortgage acceptance any sums already paid must be reimbursed by the seller if the mortgage is declined. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it. Changes in the exchange rate may increase the Sterling equivalent of your debt.