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French or UK mortgage?


baz & kaz
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Hi,

We are in the process of looking for a holiday home in France and can re-mortgage to finance the project. However, we have been told French interest rates are much lower, but with large set up fees.

So now we have to weigh up the pros and cons of UK v French mortgage.

Anyone got any advice they would like to offer?

Baz & KazConfused [8-)]

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In purely financial terms, French mortgages, at around 4%, do appear quite a bit cheaper than British ones, currently at about 7% standard variable rate. Another plus for the French option is that you can get a loan that runs at a fixed rate for the full term, useful if you think current rates are unlikely to get any lower. But there are some good offers in Britain with fixed or discounted rates over the shorter term, and the associated costs of setting up a loan tend to be less in Britain.

But if your income is in sterling you do have to seriously consider exchange rates as well as interest rates. I remember having an ecu mortgage (anybody else remember the predecessor of the euro?) from a French bank - this was on an English house, well before buying in France was ever an option for me. I got it because we were able to, from a specialist London broker, and at about 8% it was a lot better than the 11%-plus that English lenders wanted at the time. Fortunately, it contained an option to switch to and from a sterling-based loan a limited number of times - fortunately because although it was a variable rate, about five years years into the 15 year term sterling rates had come down to match European ones, and changes to the exchange rate had made sterling a much better deal.

French lenders are also pretty rigid about the amount you can borrow (your total loan repayments, not just your French mortgage, cannot be more than a third of your income) and this might be a problem if you have a British mortgage, credit cards, personal loans and want additional finance for a holiday home. Then, you would probably be better raising an extra loan on your main home.

If we knew whether a French or British loan would prove best in the medium to long term we would all be making our fortunes on the currency exchange market. [;-)]

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[quote user="Iceni"]

Do you mean EUR vs GBP mortgage ? If yes then borrow in the currency that yields income thus minimising currency exposure.

If no, no idea.

John

not

[/quote]

The flip side of that is that if you borrow in Euros you hedge the investment in your property.  i.e. the euros you get on the sale of your french house will go to repay your euro mortgage - rather than have to be converted to sterling (at whatever the then rate is) to repay a UK sterling mortgage....

Kathie

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Will has the point to a tee, we bought our property with a french mortgage and so far it works well for us, but we don't have a personal mortgage in the UK, just business loans which don't count as part of the 30% you can borrow. We got our french mortgage through a broker who was OK but not fabulous, if your french is ok and with the help of your agent in the area you are looking in I would sort out the mortgage local to that area, I would also start the process long before you find a house as they ALOT of information and any offer you put on a house will be taken more seriously if you have a mortgage in place, saying all that according to our agent most people remortgage in the UK as its easier if not cheaper.
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We also have a French mortgage - fixed at 3.8% for 15 years.  Even with the set up fees and the cost of (obligatory) life insurance, this was the best deal we could find (and I work for a bank so get staff rates!)  I would also second the comment above - your French mortgage is the one thing that will slow down your purchase so if you can get the ball rolling beforehand...

Kathie

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Have had another thought on french mortgage, we were told about an interest only fench morgage which was very cheap but you had to have 120% of its value as equity in your UK home which seems to get the best of both worlds, anyway just a thought
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A personal perspective.

I rather like reducing forward obligations to known quantities where possible.

If one takes a Euro mortgage on a floating rate deal - I understand that earlier fixed-for-term deals are now not too common - then a whole series of potential downsides come into play.

The main reason Laker airlines crashed was that he had borrowed in the USA - to buy his fleet of 'planes in US $, but his core revenue stream was in £s. The pound hit almost equity with the US $. Goodnight Laker. (It was far more complex than this as political undertones came into play between the UK and US governments and the 'plane's suppliers, however, the core reason Laker hit cashflow and thus liquidity troubles was his borrowing in US$).

If your personal income stream and therefore ability to debt service (pay interest) and reduce capital is based in £s sterling and your mortgage is based in Euros, then you are exposed to the vagueries of the forward exchange rate, each and every time you transfer funds.

If and when you sell and repatriate (bring back) the released money, then you have to convert Euros to sterling in any case, unless you elect to leave the balance on deposit in France.

Thus, whether you borrow in France or the UK, you have exchange risk exposure when you sell the property.

Whilst a UK sterling mortgage will mean a higher effective interest rate, at present, probably, the potential forward exchange costs make it about even: furthermore, if the French lender stipulates a floating rate mortgage, then if and when the French interest rate rises - as the ECB (European Central Bank), raise Euro rates - this cost advantage is soon lost.

At present, the Euro rates are being held down by the ECB, mainly due to pressure from the large Euro-manufacturing and exporting corporates like BMW, Chrysler-Mercedes et al. The underlying economic indicators, however, point up a trend, forward, which will probably mean a Euro rate rise.

Conclusion: if borrowing in Euros go for a fixed interest for the term deal. The extra Front-End costs will be offset by the lower interest charges. One caveat, however: do work our, carefully, the additional extra costs of life assurance, which tends to be mandatory amongst French lenders.

If not available, then base in sterling.

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  • 6 months later...

Hi B&K

I'd say definitely go for the French mortgage option. There are all sorts of mortgages out there: fixed, variable, interest-only, introductory offers. Expect to pay more (in the long run) for anything fancy. An English-speaking broker working in France will be able to find the best French mortgage, just check them out on the web. One word of warning. There are two types of English-speaking broker operating in the French market - those that charge you mortgage arrangement fees as well as keeping the bank commission and those who don't charge client fees. Don't pay twice for the same service!

 

Good luck,

Mel

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[quote user="Mel "]

Hang on....... !                      Shocked

I'm Mel - how can you be registered as Mel as well?

(I think you might be David)

You're an imposter...

Mel

[/quote]

This is really naff software, you know...

(In case you missed it, I have changed my screen name to "Mel" then posted this. But, because I don't like it, I'm gonna change it back. Rubbish software...

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[quote user="Mel"][quote user="Mel "]

Hang on....... !                      Shocked

I'm Mel - how can you be registered as Mel as well?

(I think you might be David)

You're an imposter...

Mel

[/quote]

This is really naff software, you know...

(In case you missed it, I have changed my screen name to "Mel" then posted this. But, because I don't like it, I'm gonna change it back. Rubbish software...

[/quote]

This can get very confusing........

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