French mortgage products are designed to maximize security to the borrower as this is what the market wants. Therefore the majority of loans in the French mortgage market will be on a long term fixed rate or a capped rate.
These product types ensure you know how much you will pay each month – or in the case of a capped mortgage, what your maximum exposure could be. Even pure variable mortgages offer a decent level of protection. The majority of variable rate loans are ‘elastic’ and can stretch by up to five years if rates increase so that your mortgage payment will remain the same up to an increase of approximately 0.75%. In addition, any increases to the mortgage payment are generally limited to the rate of inflation per year, meaning an overall increase of 2-3% per year.
Further protection is offered by French law so that should you take a variable rate mortgage you will always have the option to call your bank and switch to a fixed rate for the rest of the term. Please be advised that if you make this switch, you may have a penalty to pay and you will not be able to switch back to a variable rate mortgage. These extra features offer peace of mind to the prospective borrower in France but do vary from bank to bank. It is important to get to the bottom of these features when comparing the different offers in the market.
Interest only mortgages
With an interest only mortgage (prêt infiné), as the name suggests you only pay the interest on the amount you borrow. If you borrow €100,000 at a 4% interest rate you will have to pay €4000 per year. After 20 years you will still owe the €100,000 and have to sell the property or find funds from elsewhere to pay back the money you have borrowed . Hopefully the property you bought will have appreciated in the mean time so you will have made a profit whilst keeping your costs down.
Interest only mortgages are the mortgage of choice for investors looking to make a return by selling the property for more than the purchase price.
Repayment mortgages, on the other hand, are more expensive as you have to pay the interest on the €100,000 and also pay off a portion of the capital. These mortgages are often called ‘capital and interest’ mortgages.
The payment for €100,000 now rises to say, €7200 per year, or almost double. Repayment mortgages are best used for main residences or for investments, like leasebacks, where the aim is to pay the mortgage off and enjoy the income. Repayment mortgages (prêt ammortissables) are the most common mortgage in France and offer the most protection and long term value.
The vast majority of variable rate mortgages in France are “Tracker mortgages” with fixed margins over a Euribor* index.
Margins and duration
Margins on such products range from 1-3% and are fixed for the term with lower margins available for shorter durations and higher deposits. Variable rate mortgages in France are generally available for 25 years with longer durations also achievable.
Tracker mortgages may be linked to the twelve month Euribor which will mean that your variable rate is revised every twelve months. Likewise, loans based on the three month Euribor will be revised every quarter, taking into account the average variation of the three month Euribor for the past quarter. The Euribor indices move according to changes in the European Central bank base rate, the available money supply and the levels of trust between banks. Variable rate mortgages in France generally have no early redemption penalties.
Watch out for low teaser rates which show a low initial rate for a short period and always check and compare the margin on any variable product after any fixed rate period.
* Euro Inter Bank Offered Rate: the rate at which banks will lend funds to each other on a short term basis
Fixed rate mortgages
Excellent value. The French mortgage market offers excellent fixed rate mortgages in comparison with the UK. Whereas in the UK, the majority of fixed rates on offer are for 5 years, in France borrowers generally fix their mortgage rate for the term of the mortgage, so fixed rates for 15, 20 and even 25 years are very common.
These fixed rates offer value for money as the competition for such mortgages is fierce in France. You can get an idea of the margins for fixed rate products by looking at the TEC 10 index in France. This is a fictitious 10 year government bond yield which forms the basis for many of the banks long term mortgage products.
Early repayment penalties are common for fixed rate mortgages and you can expect to pay a minimum of half the interest rate or 3%, whichever is the lower, on any amount you are paying off early. If you plan to pay off a large lump sum at a specific point in time, see if you can negotiate no penalties on this sum in advance.
Capped rate mortgages
Capped rates are the second most popular mortgage product type for the French resident mortgage market. Again, these are excellent value when compared to the capped products available in the UK. Caps will be for the term and usually be a Cap + 1% or Cap + 2%. With these products, your interest rate will never be able to increase by more than either 1% in the case of the Cap + 1% or by 2% in the case of the Cap + 2%.
Index and margin
These variable rate products will be based on a Euribor index and will vary in accordance with changes in the index. You can expect to pay a higher margin on a capped product than on a pure variable rate tracker mortgage owing to the greater security you enjoy, with a ceiling to the amount you will pay on a monthly basis.
To find the margin for a capped product you have to look at the initial rate offered for the product and then deduct the prevailing rate of the Euribor index to which it is linked. E.g. Initial rate 3.10%, current 3 month Euribor rate 1.1%, so 3.10 less 1.10 is 2% is the margin. The actual rate you will pay will only be determined on the day the offer is written and sent out to you.
Hybrid products are another peculiarity of the French mortgage market.
Split product type
The first type of Hybrid mortgage product is based on a split of the mortgage amount between two different mortgage types. Half of the loan might be put onto an interest only mortgage product whilst the other half is put onto a repayment product. This type of mortgage is generally used by buyers looking to mix the security of a repayment mortgage product with a reduction in overall cost brought by the interest only portion. There will be a requirement for borrowers seeking this type of mortgage to have net assets of 120% to 150% of the loan amount requested.
The second type of hybrid mortgage combines a period of interest only on the full amount of the loan, followed by a second period during which full repayments are made each month using a repayment mortgage product. Typically, the split will be for 10 years of interest only followed by 20 years of repayment, thought many other splits of these durations are possible.
Be aware that when calculating the affordability or debt ratio, banks will consider the amount due during the repayment period making this type of loan harder to afford.
* Find out more about French mortgages at French Private Finance