mortgage or cash purchase

[gert]

hello all,

having a bit of a confused day today so decided to turn to the forum for inspiration!

being a rather simple non financial type of person i`m wondering if anybody can give me a brief outline of the pro`s and cons of buying property in france with a french mortgage as opposed to a cash purchase.i appreciate i get to hang onto my cash but does this work out beneficial when the interest i pay on the mortgage is taken into account. yes i know i need a financial adviser and i also know i am stupid but any thoughts on the subject would be appreciated, or maybe the subject is just too broad to answer in an e-mail. can somebody more intelligent please share their knowledge and experience?

[sue-J]

A mortgage is a loan secured on a property. The property belongs to the lender, until you've paid back all the loan, although ou are responsible for maintaining the property.

If you borrow money on a mortgage, you pay interest. Over the life of a mortgage of 100,000 euros, say 25 years, you'll pay many tens of thousands of euros in interest, in addition to the cost of the house.

If you think about getting a mortgage ask the provider for 1) the monthly interest, 2) the TOTAL amount of interest you'll pay over the life of the mortgage. You may be unpleasantly suprised by figure 2) and then you will know why few of the mortgage providers alow you access to this figure using their online calculators.

Try this one and see:

http://money.guardian.co.uk/calculator/form/0,1456,603156,00.html

If you pay cash for the house (no loan) you don't pay interest.

If you pay cash, then you won't have so much cash in the bank earning interest, but you will have, as long as house price inflation exists a house increasing in value (at the moment) between 3 and 5 percent per annum. You have to pay for maintenance on the house to maintain its value, and if you run out of money, the whole house is still yours to sell.

If you get a mortgage and can't keep up the repayments, you can lose the house. You may also have to pay for insurance you don't want, the mortgage rate can go up so you'll paying more interest than you planned, (it can go down too) increasing your payments.

Mortgages are for people who don't have enough cash to buy a house. Like all loans they cost you extra money, and as the loan is for a long period, they cost you a lot of money over a long time.

sue

[sue-J]

Oops, the cut and paste didn't work.

In the example above, at 5% over 25 years you will pay £75,300 pounds (approx)interest on top of the purchase price of £100,000. Total price for the £100,000 house:

£175,300.

[makeiteasy]

Dear Gert,

Sue has given good explanations but there are others points which could be VERY important and the main one is about wealth taxes. If you buy your property with a mortgage you could avoid to pay wealth taxes which could not be the case if you pay cash!!!

Owning French property or moving to France from the UK makes you liable for a completely new tax: wealth tax. If you move to France with the intention of living there indefinitely you will become a French tax resident the day after your arrival. You will then be liable for taxes on your worldwide income; capital gains tax; succession tax; gifts tax; VAT; and if that was not enough, wealth tax (Impot de Solidarité sur la Fortune (ISF)).

The wealth tax rules vary according to whether you are tax resident in France or not. In both cases, wealth under €732,000 is tax free, but if your assets are worth more than this the tax rates start climbing.

Wealth tax rates for 2005 are as follows:

Gross Worldwide Assets of Household	%	Tax on Band	Cumulative Tax
Under €732,000	0	0	0
€732,000 to €1,180,000	0.55	€2,464	€2,464
€1,180,000 to €2,339,000	0.75	€8,693	€11,157
€2,339,000 to €3,661,000	1.0	€13,220	€24,377
€3,661,000 to €7,017,000	1.30	€43,628	€68,005
€7,017,000 to €15,255,000	1.65	€135,927	€203,932
€15,255,000 upwards	1.80

Non-residents
If you buy a holiday home in France and remain tax resident elsewhere, you will only be liable for wealth tax on your net taxable assets in France, unless exempted by a double tax treaty. Unfortunately for UK residents, the UK/France tax treaty does not exempt non-residents from French wealth tax if they own more than €732,000 in France.

Portfolio investments and cash are excluded, but the value of shares in a SCI (a French incorporated company set up to own property) are included. However loans specifically attached to the French assets may be deductible against the asset value to reduce your wealth tax calculation. The loan could, for example, be from a non French company owned by you.

French residents
French tax residents are liable to wealth tax on their worldwide assets including all property. It will be based on your household’s wealth (including spouse and children) as at 1 January each year. Unmarried couples living together are treated as one household for this purpose.

The list of taxable assets includes the following:
• Real estate
• Furniture
• Cars and other vehicles
• Horses
• Jewellery
• Shares and bonds
• Redemption value of any life assurances
• Endowments
• Debts owed to you

Another way to get a mortgage when you have cash, is to invest your money on a special saving account(assurance vie) which the allow the bank to set up an interest only mortgage.

This "assurance vie" will guarantee your mortgage(and avoid any hypotheque, so the house is still yours) and you just pay the interest instead of capital+interest.This "prêt in fine"(name of this mortgage) is usually done on 10 years.The good point is if you die during the duration, the insurance which is set up with the mortgage will repay it and leave your family with your house AND your money invested on the assurance vie(be carefull to not mix up with a life insurance which is a capital that you get when you die but which is not a saving ).

I hope my explanations are enough clear but if you have queries, please PM me

 

 

[P]

Isn't this a question of where you will be resident and the interest that you can earn on the capital if invested and the interest on the mortgage.

In the UK you can easily earn 5% gross interest on a safe investment - giving 4% net to a standard rate tax payer and lower amount to a higher rate tax payer.

If you can get a mortgage that has an interest rate of equal to the interest you will receive or less it would make sense to go for the mortgage option. But it is a gamble as to how rates will go

[letrangere]

Historically, in a fast moving market if you were a cash buyer you had a better chance of getting the house you want as the seller may be more interested in selling to you than to someone who had to fiddle around getting a mortgage in place.  I've heard (though have no first hand evidence) that cash buyers are sometimes able to negotiate a better deal for similar reasons. M

[sue-J]

Sue has given good explanations but there are others points which could be VERY important

I'm sure Gert enjoys being patronised as much as I do.....

sue

[gert]

thankyou for the reply`s,

wealth tax is not a problem for me as i am not that wealthy!!

i intend to become resident here (been here for three months) so i can`t leave my money in the uk and get a mortgage here anyway (without transfering my money to france) which knocks out the interest covering the repayment option (i think!) and savings rates are not the same here ? so looks like a cash purchase and a possible remortgage against existing property in the future as i would to do a buy to let or two. who knows? can`t find what i want at the moment so maybe i`ll start looking at plots and build. tricky trying to work it all out when you first get here, i`m sure you have all been through it !! i`m in 24.

 

[Sprogster]

The answer to your question depends whether you intend to be French resident or not.

If someone is buying a second home in France and does nor intend to become French tax resident. Having a mortgage secured against the property, thereby reducing the net value of your French assets can have considerable French tax benefits.

Firstly and probably most importantly, unlike in the UK assets passing between spouses upon the death of one of them are liable to French inheritance taxes.

One way to protect the surviving spouse from ending up with a big tax bill used to be to own the property through a company, such as a French SCI. However, there are distinct Capital Gains Tax disadvantages in this and therefore most tax advisers I deal with professionally in France, now recommend the mortgage route. Whereby you reduce the value of your French Estate, below the threshold of French inheritance tax liability.

Other benefits include wealth tax mitigation and if the property is let, the interest on the mortgage can be offset against French tax on the rental income. Which is due even if the owner is non French resident.

Most importantly always get independent professional tax advise and do not rely on opinions given on this forum.