Mortgages to beat the Euro

Taking out a French mortgage could save you a significant amount in the medium term, explains Jo Cowling…

Purchasing a property in France for the first time will raise many issues that you may not have previously encountered when buying property in the UK or elsewhere. There are many different aspects to consider, and whether or not to complete the purchase using a French mortgage is one. Using a French mortgage may make sense, even when affordability and the availability of funds may not be your key concern.Here we look at a couple of scenarios where a French mortgage may make sense to help you make that French property dream a reality.The current exchange rate has made the sterling cost of purchasing a property in France higher than it was this time last year. A number of commentators have highlighted that they expect the euro to weaken against sterling in the medium term.Historically, the overwhelming majority of British clients (over 70% during 2007 according to one major French lender) who purchase property in France do so without a French mortgage. Buyers traditionally fund their purchases using existing cash assets or by raising further funds against a UK property.However, two of the many side effects of the recent turmoil in the financial markets is the reduced availability of mortgage finance in the UK, and also what is a low €/� exchange rate by historical standards.The recent survey, The International Mortgage Outlook 2009, which outlined the views of 20 of Europe’s most active overseas mortgage lenders, highlighted that over 79% of lenders expect to see the €/� exchange at €1.20 or higher by the end of the year. Many investment banks are also anticipating an upturn in sterling’s fortunes.Scenario oneMr and Mrs Bennett are interested in purchasing a property in the Dordogne for around €300,000, and are hoping to find their dream holiday home this summer. Although they have the money available to complete the purchase using cash, which is held on account here in the UK, the currently low exchange rate is making them consider alternatives to transferring these funds.The Bennetts are considering taking out a flexible French mortgage to cover 80% of the purchase price of the property, with the expectation that, when the exchange rate recovers in future years, they will be able to redeem the mortgage using funds they have in the UK.Based on a purchase price of €300,000 and a current exchange rate at the time of writing of €/� 1.125, purchasing the property outright in sterling would cost �266,667 (excluding notaire’s fees and other purchase costs).By taking a French mortgage secured against the property for 80% of the property value, the breakdown of the final cost would be as follows; • 20% (€60,000) deposit paid using sterling funds = �53,333 • 80% French mortgage = €240,000If, over the next five years, the exchange rate increases in sterling’s favour to around €/� 1.25 and the French mortgage is redeemed, the final sterling cost of purchasing the property will have been: • €240,000 @ 1.25 = �192,000 to redeem the French mortgage • �53,333 for the original 20% deposit • Total = �245,333The final sterling cost of purchasing the property using a French mortgage will therefore be almost �27,000 less than if the Bennetts decide to complete the transaction using their sterling-based assets. If the exchange rate increases to €1.35 this potential saving increases by almost �5,000!There are, of course, other factors that need to be taken into consideration. This example doesn’t take into account the costs of repaying the French mortgage during that period, and also makes no account of the return that the Bennetts could expect from leaving their sterling on deposit or invested in other assets over this period. There is also no guarantee that the value of sterling will improve against the euro in five years time.Scenario twoMr McIntosh and his partner are considering purchasing a holiday property on the C�te d’Azur for between €1.5 and €3m. While they have the money available in the bank, having recently sold one of their businesses, they have heard that there may be potential tax benefits to financing a proportion of the purchase with a French mortgage.In France, wealth tax is payable by non-residents on their personal net worth (as of 1 January each year), based on the value of the assets they own in France.The ownership of a French property is classified as a suitable asset class and therefore anyone who owns a property in France with a net value of above €790,000 could potentially be liable to pay wealth tax. The good news, however, is that having mortgage debt secured against the property offsets this potential liability.Mr Macintosh is considering taking out an interest-only mortgage against the property to ensure that the net’ value (net value is taken as the property value less any outstanding mortgage secured against it) does not exceed this €790,000 threshold. At the lower end of his budget, this equates to a mortgage loan-to-value (LTV) of around 47%, while at the upper end this would require a mortgage equivalent to just under 74% of the purchase price.At the lower end of Mr Macintosh’s budget, the potential tax saving would equate to around €4,345 per annum, while at the higher end the potential tax saving would be around €16,795 per year. With the tax bands increasing in line with the value of the property, the potential benefit of offsetting wealth tax in this way obviously increases significantly as an individual’s net worth increases.As is always the case with complex scenarios like this, it is important that Mr Macintosh seeks independent legal and tax advice. In this example, we have simply looked at the tax benefits of using a French mortgage to finance the purchase, and have not included either the costs of taking out the mortgage or the benefits to the individual of being able to keep the additional funds on deposit or invested in other assets.While everyone’s personal situation is different, these two examples hopefully highlight that there are a growing number of scenarios that should be considered when considering the financing options of purchasing a property in France. Jo Cowling is a French mortgage advisor at International Private Finance Tel: 020 7484 4600 www.internationalprivatefinance.com