The European Central Bank is increasing rates at a fast pace - and fixed rate 15-year mortgages have already increased from below 1% in 2021 to around 2.5% in early 2023.
At the same time, banks are tightening their rules for eligibility and allocation of loans.
To get the best rates, you must identify the right bank for the required type of loan
Using a French bank will ensure that
If you are non-resident, your home bank may be able to offer a loan. However, if the loan is not properly recorded in France, it is not deductible for French tax purposes.
French banks are fully aware of the rules and regulations and so you’ll avoid administrative difficulties.
Application forms are usually available in English, and many banks accept foreign proof of income - so the process is simple.
Loan repayments will be in Euros, so if your income is in another currency, you may want to consider a forward conversion contract to avoid concerns about future exchange rate fluctations.
How much can I borrow ?
French banks have always been strict on lending policy. Anglo-Saxon banks have mostly relied on being able to force the sale of the property. To force a property sale, the French bank must first prove to the courts that the borrower’s circumstances were financially sound at the time of taking out the loan.
Generally French banks will expect to see total mortgage outgoings of no more than 30-40% of income, including salaries, pensions, financial & rental investment income. Most banks will take average income over the last three years. If you are self-employed or living off capital and investments, it is important to present your financial situation carefully.
If you wish to raise funds on an existing French property (Equity Release mortgage) you are generally limited to about 70% of the property value. You will have to justify how the funds will be used, though paying off another mortgage is not usually a problem.
If you are buying via a Société Civile Immobilière (SCI) one or more shareholders will generally have to provide a personal guarantee.
As in most countries, you will have a choice of “gradual repayment” or “interest-only with full repayment at the end of the term”. You can often obtain a mix - for example interest only for 5 to 10 years, followed by 10 to 15 years of repayment.
Repayment mortgages in France are generally up to 25 years maximum. Fixed interest rates are available for the whole duration. Penalties are applied in the event of early reimbursement (though these are usually negotiable).
We would generally recommend using repayment mortgages for your main home as good financial planning.
Interest only mortgages are more suitable for rental properties or for specific tax planning purposes.
Often, French banks will only provide interest-only mortgages if you place a deposit of around 20% at the bank. This type of loan is known as IN FINE. The deposit is usually held in the form of an Assurance Vie. Any investment decisions inside the Assurance Vie must be “approved” by the bank who keeps a charge over the funds. These funds will hopefully grow over the years and pay off all of most of the mortgage at the end of the term. Obviously this depends on the quality of the investments - and it’s worth negotiating a “good assurance vie” from the start. As for any Assurance Vie, watch out for entrance, management and transaction charges too.
French mortgages to limit property wealth tax
As a French resident or a non-resident, it may be in your interest to use a mortgage - even if you have sufficient capital. You are only liable to the new property wealth tax (IFI) on the NET value of your French property - less any loans DIRECTLY associated. In order to prove the association, the loan should be registered as an “hypothèque”. Loans recorded in the purchase deed are generally also considered as deductible.
Please note that loans from family members (or from yourself if the property is held via a company such as an SCI) are not deductible for IFI wealth tax purposes unless you can prove the reality of the loan including regular repayments.
Interest only loans are only partially deductible for IFI wealth tax purposes - so as to bring no significant advantage compared to equivalent repayment loans.
Unfortunately some banks may charge more for the mortgage than the property wealth tax itself. It is therefore important to negotiate, calculate the tax saved - and plan carefully how to invest the “unused” capital. You should ensure that the purpose of any action taken is to increase your wealth - and not simply to avoid taxes.
As a French resident, any “unused” financial capital should normally be invested into an Assurance Vie providing appropriate tax efficiency and access to a guaranteed low-risk Fonds en Euros.
If you require assistance, please outline your requirements and we will put you in touch with the mortgage expert we consider best suited to your particular needs.