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

French Property News - - Contents - Felic­ity Sul­li­van is an in­ter­na­tional mort­gage con­sul­tant at In­ter­na­tional Pri­vate Fi­nance Tel: 0207 484 4600 In­ter­na­tion­al­pri­vate­fi­nance.com

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.

Even keel

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.

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