French mortgages: how to avoid possible pitfalls

While mortgages for non-residents are now easier to obtain in France, negotiating cash flow with French banks still needs careful handling, as Sharon Hill explains

Life has a habit of throwing curveballs and sometimes the best-laid plans go astray. It happens frequently. Someone sees the property of their dreams and gets caught up in the excitement. Already envisaging themselves in the property, they then look at the list of documents required in order to apply for a French mortgage and baulk.

Pressure from the vendor, who maybe has other potential buyers and a keenness to secure the property, leaves the buyer deciding to pay with cash rather than with the help of the mortgage. Or it could be that the buyer simply didn’t realise that as a non-resident in France with foreign income, it was even possible for them to obtain a French mortgage.

Often, people purchase their French property with their lifetime savings or from the benefits of a property sale, an inheritance or other windfall. Then, one day, something unexpected happens and they find themselves in need of some money. Freeing up some cash from unencumbered property assets is frequently viewed as a solution.

In UK and American culture, releasing equity from a property is the norm and the banks have no issue in arranging these types of mortgages. They have become the go-to solution for many property owners requiring cash or funding for a project. In France, however, it is not the norm and when available it has very strict criteria which limits access to the cash people have locked up in their property. French banks are immediately suspicious as to why people wish to release equity from the property; for them it hints at cash flow or other financial problems.

The obvious solution is to advise people to use leverage when purchasing property so that they are keeping their cash savings for emergencies and projects. However, when people come to us with a cash flow problem it is usually too late as they already own the French property.

There are some solutions, however, and understanding their availability and how they work may help.

EQUITY RELEASE

Releasing equity from property in France is clearly not as straightforward as in the UK, and the term equity release is actually misleading as you can’t just extend your French mortgage to release equity for the sake of releasing it.

You can’t borrow against the equity you have in the property either. Lenders in France will always need to ascertain the affordability of the monthly mortgage payments against your earnings, unless you are able to place a considerable amount of money (at least equal to the size of the mortgage) in an account with them as a mortgage guarantee.

To successfully arrange equity release you will need to demonstrate what the money is being used for (renovations, school fees, purchase of another property) and the banks will only release the equity specifically to fund the project in question. If there is an existing mortgage on the property, this will also need to be refinanced.

The French banks won’t lend against the French property for you to restructure existing debts in the UK, although it is possible for French residents to borrow against their property in this way so long as the loans to be refinanced are in France.

Similarly, those undertaking building or renovation projects cannot release further money from the equity in the property as work progresses and the value increases. This is frequent in the UK (as is often shown on TV shows) so it is important to realise that this isn’t an option in France. French banks are very conservative in their lending and certainly do not see themselves as being there to sponsor someone’s cash flow problem.

PRET VIAGER HYPOTHÉCAIRE

Generally reserved for elderly property owners, this is actually a type of equity release loan. It allows the borrower, who has to be a French resident, to release money from the property they own to spend as they so wish. The amount of the loan is determined by the property value, as well as by the borrower’s age and sex.

There are no monthly reimbursements throughout the duration of the mortgage but interest does accrue at a much higher rate of interest than a normal loan, and this is added to the outstanding capital.

At the end of the mortgage the interest and capital must be paid back, although there is always a ceiling on the amount due as it cannot be more than the property is worth.

The end of the mortgage is normally when the borrower passes away; if there are two borrowers, when the second borrower passes away. The estate then decides whether to reimburse the loan if they wish to sell the property, or let the bank sell the property if they do not wish to inherit the loan/property.

Therefore, you can’t release equity from a French property to replenish your savings or to improve your cash flow, unless you are an elderly French resident, hence why it is so important to either purchase with a French mortgage to start off with, or to obtain a post-purchase mortgage as described below.

POST FINANCING

Post financing is the perfect solution for buyers who were in a rush to secure a property and decided to purchase without a mortgage.

The purchaser could apply for the French mortgage before completion on the property purchase or in the six months following completion, and could benefit from a normal French mortgage as long as all the normal eligibility criteria were met.

The purchaser would have to justify how they originally financed the property purchase and provide proof of the origin of funds, as well as all the normal paperwork required for a French mortgage application (proof of income, bank statements, proof of ID etc). The acte de vente in France is also required.

The mortgage lender would then treat the application in the normal way and may carry out a valuation of the property if they deem it necessary. A mortgage guarantee and mortgage deed would be registered via the notaire and the bank would release the money to the notaire, who in turn would then transfer the money to the borrower once the mortgage deed is completed.

Contrary to equity release, the mortgage is literally reimbursing the buyer the money they have already spent on purchasing the property.

A better understanding of the options available and initial financial planning can definitely help many people from becoming unstuck once they already own their French property. Interest rates are at a historical low and mortgages are readily available to non-residents with loan-to-values (LTVs) of up to 85%.

Sharon Hill is owner of French Mortgage DirectTel: 0800 530 0673