To assist, below please find below the answers to the 5 most frequently asked questions - if you have other questions, always feel free to contact us the 5 questions dealt with below are:-
How much can I borrow / how is it worked out ?
How long does it take to arrange a French mortgage ?
How do you get paid for your service ?
What would it cost me, if my application was unsuccessful ?
What about currency risks ?
"How much can I borrow / how is it worked out" ?
This is the most frequently asked question of all - but, unfortunately, it is also one with no easy answer. Because of this we have given this question a long and full answer. We hope this will help you understand the French "affordability" concept which applies to French mortgages, but do contact us if you need to clarify anything involving this fairly complex topic.
Firstly, under French lending rules and by Law, French lenders must "take into account the affordability of any proposed new mortgage lending". All types (and nationalities) of lenders usually do so, of course, as part of prudent and responsible lending.
Many UK lenders operate on "income multiples" when assessing lending amounts, but even when doing so, account is still taken of the proportion of a clients' income being taken up by the proposed mortgage payments.
But, in France, lenders must consider affordability very carefully due to consumer law. But, it is left to each lender to determine what is and what is not 'affordable' in any one case in their view, and because of this, you will find varying advice and information on the internet on how a lender assesses this topic of affordability, with some commentators saying its based on 33% of gross (before tax) income, others that its based on 33% of your net income etc. In fact, its not 33% of anything, by law or regulations at all !
The "normal" or most common affordability criteria used is that, at the time of your mortgage application, the new proposed French mortgage monthly payments plus all / any existing financial commitments, such as any existing mortgage payments, rent payments, loan repayments and other ongoing "contractual financial commitments" (such as Maintenance payments) must not exceed 33% to 35% of your total Gross monthly income (or, as already mentioned, with some lenders a less generous % of Net income is used).
However, for clients who are 'higher earners' (i.e. the income is upwards of £75,000 pa or equivalent), the basic rules may not be applied in all cases - although its fair to say such matters are subject to ad hoc assessment and agreement - we have done cases where the debt ratio was more like 42% on a few occasions, or more commonly, in the region of 35% to 40% for such clients - hence this shows the flexibility that can exist in some cases, and where the client's financial profile shows its merited.
Please refer to our podcast for an example of how a case is worked out.
For joint income mortgage cases, the joint incomes are added together and each partner's, and any joint and individual existing financial commitments are counted too.
For employees, "gross monthly income" means "before tax" income and where used, the term "Net income" means "after tax" income or "take home pay". For self employed clients, a different income definition is used (normally involving an assessment and interpretation of the last 2 or 3 years' accounts, in particular the annual Taxable Net profits, backed up by personal banking records). For directors of Limited companies, normally any salary and dividends (averaged out over the last 3 years) will be assessed (and possibly any balance left over in the Capital Account of the Company may also be assessed).
Other types of verified gross or net income can also be assessed, including Investment income, State and Private Pension income, Rental (aka 'Buy to Let') income, maintenance payments received etc.
State Benefits are normally excluded from income assessments.
Existing "financial commitments" do not include normal day to day living expenses - such as food bills, Utility bills, Council Tax and such like.
So, if you take two individual clients who may have identical incomes, they would not be able to borrow the same amount on a French mortgage if one of them had much higher existing "financial commitments" than the other. They would have different "affordability" capacities, even though they may bring home exactly the same amount of money each month. Accordingly, there is no easy answer to how much you can borrow, as your own circumstances, income and outgoings are obviously unique to you.
This reinforces the need to have us very carefully check and review your current circumstances by you fully (and accurately) completing a Decision in Principle Form, which is located in the "Decisions in Principle" section of this Website. This allows us to determine for you the mortgage availability and the amounts you could borrow. We are always very happy to work these figures out for you, without obligation. You can establish all this without talking to us, as we use e-mail communication in most cases. If you wish to complete the Decision in Principle form you can use this link to take you to that section of the Site.... Decisions in Principle
However, it follows logically from what we have said above that if you already have a third, or more, of your gross monthly income going out on existing mortgages, loans etc , you are very unlikely to be able to raise a significant French mortgage. You should also question the affordability of any further commitments as the conventional wisdom is that breaching these guidelines would normally begin to cause you financial stresses and difficulties.
Please also note that any potential letting income from the proposed French property is not normally considered, when assessing French mortgage applications, although knowing about it might make a difference at the margins.
Lenders simply will not fully take "potential rental income" into account, for a number of good reasons. Your application must stand up on its own merits, without inclusion of prospective French letting income. You are however, normally free to let the property if you wish.
Although the affordability concept and rules may seem rather complicated and involved, the idea is to prevent clients from over-committing themselves.... and for lenders to act responsibly in reaching lending decisions. That has to be good thing on both counts, of course.
Lastly, please remember that the overall amount you can borrow is also partly related to your available deposit funds. If you are not already resident and taxed in France itself at the time of the application, you must normally be able to put down a minimum of 20% of the purchase price or 15% for cases where you intend borrowing at or well above € 100,000 euros. For clients resident and taxed in France itself at the time of their application, lower deposit levels are required than for Non resident borrowers. In fact, mortgages of up to 100% are then potentially available.
In addition, you will need to have available the Notaire's fees (buying costs), which can range between 7-8% of the purchase price. Ideally, you should also have some degree of savings left over, after paying the personal contribution and legal fees.
"How long does it take to get a mortgage arranged" ?
Typically, it takes around 2 to 4 weeks (mainly depending on you really) for a mortgage offer although we can often obtain a decision or early indication based on the financial aspects of your application within a few days of the lender receiving your material from us.
It is also possible to make an application without a property in mind (i.e. to 'pre-qualify' for a mortgage) so that when you have found somewhere you wish to buy, your full mortgage application will be processed that much quicker, as the profile and status (financial aspects) of your case would have already been looked at and agreed.
As a general point, the better the quality and accuracy of the initial case submission, the quicker it will be processed by a lender. We put considerable efforts into this aspect and have a huge amount of experience: before you apply for a mortgage, we will have fully briefed you on all the items required in conjunction with your mortgage application - so you can plan ahead and gather together exactly what you need in good time.
"How do you get paid for your service" ?
We are paid by the French lenders for the mortgage business we introduce to them. Most lenders pay us a very similar amount, so there is little reason for us to favour one lender as against another: other than for reasons which would be in your best interests: for example, us knowing which French lender would be the more likely to accept an application from you, and / or to grant a mortgage on the particular property you are interested in. For all cases of € 100,000 euros or more (which is our minimum mortgage size) our own services are provided without any onerous brokerage fees being charged at all. Our average cases size is just upwards of €250,000 euros.
"What would it cost me, if my application was unsuccessful" ?
Nothing ! There are no brokers fees from us, and no valuation fees in France.
"What about currency risks" ?
A euro mortgage payment and also the capital outstanding on your euro mortgage can change (upwards or downwards) in your own domestic currency terms, as would / will the value, in your domestic currency terms, of any French property you owned.
This risk can work both "for" and "against" you depending on currency trends and other factors.
If you are paid in Euros, then such currency issues are not generally relevant, of course.
You should also bear in mind that, as well any potential upside or downside currency risk, there are also other financial factors to consider.
One good example is if you intend to derive an income from the letting of your French property (or you decided to do so in future, even if was not the initial intention). In such cases you would be able to offset the interest on a French mortgage against the French rental income for tax purposes, whilst the property was let out - a real and potentially very useful advantage for high tax payers - especially to the Higher Rate taxpayer in the UK and to US clients. This offsetting of interest being paid would not be possible with the interest due on any domestic remortgage, further advance or any other domestic loan taken out outside of France itself - even if it was wholly used to fund the entire purchase of the French property. The loan interest on such domestic borrowing could not be offset against the French income received from the property at all.
Two further financial points are worth considering carefully:-
(i) if you borrow in Sterling (or your own local currency), your actual debt will remain constant in your own currency terms but the actual value of your asset (the French property itself) could decrease in your own currency terms - which is not very good news if your own debt doesn't decrease in the same way ! This could mean that the problem of "negative equity" (i.e. owing more on something than its worth) could build up in some cases where significant borrowing had been taken out domestically, and where the local currency debt became higher in real terms than the local currency value of the property asset.
(ii) if borrowing in Sterling (or your own local currency) you would also have the very substantial up front costs involved in converting all of the entire purchase price from your local currency into euros (as opposed to just having to convert your deposit money into euros). The true cost of this, often hidden from clients in the exchange rate figures, can be as high as 5% in real terms of all the money converted over with the difference between the buying and selling price of the currencies - very profitable for the currency exchange brokers or your own bank. This is why currency exchange firms often reside in such desirable office premises and in such prestigious areas !
There is also the question of affordability. You need to consider how "affordable" your proposed borrowing on a French mortgage is and how it compares with any other available options.
If the French mortgage payment increased, in currency terms, by say, 10% or 15%, would the mortgage payment still be affordable for you to make? Would it still be competitive with other available options ? If not, then clearly you may wish to consider those other financing options instead.
Finally, there are other risks to gauge and considerations to make, which are perhaps less to do with variations in currencies and more to do with your own peace of mind, when considering borrowing domestically as against borrowing abroad.
You need to ask yourself carefully if it is prudent and wise to increase your own domestic mortgage borrowings very substantially on your own main residence / home rather than the alternative of borrowing in France ? Would a remortgage (or other secured domestic borrowing) secured on your main home add an increased risk of keeping that home in the event of sudden financial difficulties, redundancy, divorce or in the event of a major recession affecting your income, job or your line of business ? If that borrowing was secured in France itself against your holiday or second home, would that make it an easier situation to keep your own normal home safe ? None of us can predict or may want to consider such a situation, but these things do happen, as we all know, and not always to other people.
Clearly, there are a number of factors to consider but it would be a mistake to think that local currency borrowing, as opposed to euro borrowing on a French property asset, is completely or simply without any risks. It simply isn't the case, although the types of risk may be different in their nature.
We always say that if you are in any doubt then we would advise you to stick with what you feel most comfortable with - if that means a remortgage or other type of loan or borrowing secured on your main home, or from other sources available, then so be it !
Your home is at risk if you do not keep up repayments on a mortgage or other loan secured upon it
The Sterling (or local currency) equivalent of a foreign currency mortgage will vary with exchange rate movements
All mortgages are subject to status and individual lenders' criteria.
All mortgages must be paid by direct debit from a banking account within the French banking system which must be arranged prior to any legal property completion.
Please note that any introductions to any other firms, advisers, solicitors, French notaires or other individuals outside French Mortgage Connection's control are always given without warranty on our part and any dealings you may subsequently have with third parties are strictly a matter between yourself and the firms or individuals in question.
IMPORTANT : We are obliged to mention that you should ensure that you have an appropriate "clause suspensive" (the full title = "clause de condition suspensive d'obtention de prêt") regarding any proposed / needed borrowing inserted into the compromis de vente (or other relevant type of initial French sales contract) you may subsequently enter into. You are advised to seek independent legal advice to ensure that the wording of any clause suspensive is appropriate and watertight. Under such clauses, if wishing to be protected by it, you are normally required to apply for your mortgage within certain timescales (usually 10 to 14 days), and prove you have a mortgage within 1 month of your signature(s) on the contract.
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