Mortgage ups and downs
French mortgage rates are likely to rise soon – but the system is set up to help borrowers stay in control, says Felicity Sullivan
Interest rates look set to rise, but repayments should stay reasonable
For a number of years now, British buyers have been pleasantly surprised by the low interest rates available for mortgages in France. Despite the sometimes bleak economic news coming from the eurozone, many of you have realised that these times of uncertainty have created favourable conditions to buy with a mortgage in France.
Silver linings In many ways, the French mortgage market has been so attractive because of the turbulent economic climate. The period of international uncertainty triggered by the credit crunch in 2008, and the subsequent sovereign debt crisis that hit the eurozone, applied downward pressure to interest rates. The cost of borrowing fell as a result, with quantitative easing measures introduced to help stimulate economies across the continent.
Window of opportunity The good news is that such measures are, it would seem, bearing fruit at last. Economic growth is improving in the European Union and elsewhere, which should see the end of quantitative easing measures in due course. While this is broadly speaking good news, it does mean that the cost of borrowing is likely to go up in the not-too-distant future. Indeed, most market commentators agree that eurozone interest rates will start to rise in early 2018.
The message is therefore a simple one for potential buyers in France: move quickly to make the most of the low rates. French mortgage rates currently stand at historically low levels, meaning there are still some really attractive options for British buyers looking to finance their purchase across the Channel.
However, borrowers should also look at the bigger picture when choosing their mortgage product. With interest rates set to rise in the medium term, it is important to protect yourself against these potential rate hikes. Fortunately, the French mortgage market provides a wide selection of products that are perfect for providing their borrowers with peace of mind regarding the prospect of future rate movements.
Lifetime fix? The most obvious, and indeed popular, option among borrowers is to take out a fixed rate French mortgage. Here in the UK, we are accustomed to securing fixed rates on our mortgages which last for somewhere between one and five years, at which point the rate is negotiated or becomes variable. Bear in mind that this is not the case on the French mortgage market, where borrowers can choose between products that are fixed for the duration of a 20 or even a 25-year term.
Such mortgage products naturally provide borrowers with complete peace of mind regarding the prospect of rate increases. However, lenders do tend to charge penalties to any of their fixed-rate customers who wish to make overpayments or transfer their mortgage to a new bank.
Britons taking a mortgage out in France should be aware that French borrowers, once they have a mortgage in place, almost always tend to stick with it for the duration of the term. Although there are redemption penalties if you wish to repay earlier, these are based on the interest rate being paid on the French mortgage. Therefore the good news here is that because French mortgage rates are at or near historic lows, the redemption penalties are as well.
To cap it all The charges involved in making overpayments and in refinancing mean that many British borrowers prefer to steer clear of lifetime fixed-rate mortgages in France. Fortunately, there is another option for those of you who wish to protect yourselves against rate increases while retaining a bit more flexibility. It comes in the shape of the capped rate mortgage.
These products offer the flexibility of a variable rate, but also provide some of the security of a fixed rate. The applicable French mortgage rate at any given time is made up of the base rate and a ‘margin’, which is the premium charged by the bank for the borrower to service the facility. Because of this, your French mortgage rate may rise and fall when it is reviewed on a quarterly basis. However, the rate is ‘capped’ for a certain period (often 7-13 years) at a certain level above the original starting rate. So even if interest rates rise sharply, you can be sure that the rate that applies to your mortgage will not spiral out of control.
With a capped rate mortgage you can be sure that the mortgage rate will not spiral out of control
Little ups and downs
Capped rate mortgages are a relatively new addition to the French mortgage market, and have naturally proved popular among borrowers seeking a happy medium between the variable and fixed rate. But if you are worried about the prospect of rates rising, it is also important to note that French standard variable rate mortgages do not behave in the same way as they do in the UK.
In the UK, we are used to seeing our ‘floating’ monthly mortgage repayments rise and fall depending on interest rate movements. This is not the case in France. Typically, banks will not alter the borrower’s monthly instalments by more than the French inflationary rate. Given that this rate tends to reside around 2%, it means that the fluctuations in your monthly repayments should only be small.
So what happens if there is a significant change to the interest rate? In this case, the bank calculates the interest which is accrued or lost and adjusts the overall length of your mortgage term accordingly. In other words, a drop in interest rates will result in a shorter mortgage term, while a rate rise will see the overall term extended. Meanwhile, your monthly payments will remain largely constant.
Most borrowers tend to welcome this feature of French mortgages. It means that monthly repayments should not shoot out of control if interest rates rise. Lenders tend to cap the amount a term can be increased or decreased by a length of five years, so it is always worth asking what happens once a five year alteration has been affected – certain lenders will absorb any further interest rate fluctuations, while others do start to adjust monthly repayments at this point.
Choice is yours Hopefully this article has given you an idea of what to expect if, and when, mortgage rates start to rise in France. Lenders make a number of different product types available to overseas borrowers, and the choice really comes down to your own personal approach to risk. Some among you will want to seek out the lowest rate and most flexible product possible, while others may value peace of mind above all else, particularly with the rate hikes forecast for the next 12 months.
Whatever decision you make, be sure to read any French mortgage conditions in detail to ensure that you are committing to the most suitable product for your personal circumstances. In order to do so, it is advisable to consult a dedicated French mortgage broker, who can explain all the options available to you. An expert broker will have the necessary knowledge and language skills to talk you through the conditions imposed by each product, in addition to clarifying any differences to their British equivalents. This can help to put your mind at ease during the application process, and to avoid unpleasant surprises when it comes to paying the credit back.