Mortgages: Cost and Procedure
A step-by-step guide to the practical process involved in getting a mortgage to cover the purchase of a property in France...
- Mortgage deposit
- Bank arrangement fee
- Notaire fees
1. Mortgage deposit: The maximum mortgage and minimum amount of deposit required depends on a person's nationality, their country of residence and where their income tax is paid.
- For tax payers in France it is possible to arrange a 100% mortgage
- For UK and EU residents and tax payers the minimum amount of deposit is 15% of the purchase price (an 85% mortgage)
- For residents and tax payers in non-EU countries, the minimum amount of deposit is 20% of the purchase price (an 80% mortgage)
2. Bank arrangement fee: All of the French banks and mortgage providers charge arrangement fees. Most charge one percent of the amount of the mortgage, many with a ceiling limit of €1,500, but it is advisable to check because they do differ from each other and some do not have a ceiling limit at all, a buyer may end up paying one percent of the total mortgage.
3. Notaire/Legal fees: For an existing property, be prepared for eight percent of the purchase price as the cost for the legal fees. For a new build property, assume five percent of the purchase price. In addition to the Notaire fees, there will be the land/property registration fee which varies from region to region.
Working out a price range
If a mortgage is needed to buy a property, a buyer should first establish just what price range they should be looking at and whether they have enough cash funds for the deposit and legal fees and that their income is sufficient to afford the monthly cost of the French mortgage. There are very strict rules which are imposed by the Banque de France on all the French banks and mortgage providers. These rules govern the amount a person can spend each month on a mortgage and ensure they can afford their mortgage.
Only one third of a person's monthly income may be used to service any existing mortgage or rent, other loans, credit card repayments (if the outstanding balance is not cleared every month), and maintenance payments (if applicable). What is left from that third of monthly income can be used to service the French mortgage and the cost of life assurance to cover the mortgage. For this calculation Capital & Interest Repayment figures are used which ensures affordability.
Professional advice, either from a mortgage broker, mortgage adviser, from a bank or an estate agent (immobilier) should be sought about the basic lending criteria and the various options and mortgage products available.
There are only three essential elements for qualifying for a mortgage:
- Sufficient income to service the mortgage
- Life assurance to cover the terms of the mortgage
- Acceptability and valuation of the property
1. Sufficient Income: One third of monthly income to service the monthly cost of all loans and financial commitments.
- For this calculation use gross monthly income - in other words do not deduct income tax
- For people in the French tax system, deduct social charges, but do not deduct tax
Income from tax declared earnings, pensions and maintenance payments are classed as standard, but income from investments has to be generated from recognised and acceptable income investment products, or portfolios.
Rental income from long term tenancy agreements can be taken into consideration, but usually only up to 80 percent of the monthly rental income received. Income earned from holiday lettings is not considered as a guaranteed income and is not classed as regular income, except in some cases when there is an historical track record of a holiday letting business (such as gîtes and chambre d'hôtes self-catering holiday accommodation and Bed & Breakfast businesses).
2. Life Assurance: It is a requirement that all mortgages in France are covered by life assurance. Many of the French lenders insist that their own in-house policies are used and that it covers all the terms of a mortgage. Some lenders have different policies and insist that full disability cover is included as well as life cover. Life assurance policies are medically underwritten and with a good medical record the premiums will be at standard rates. If the medical history is not good, then the premiums may be rated higher. There could be further problem if the premium is increased to a level where the cost of the mortgage and the life cover exceed the third of income ruling.
3. The Property: The bank will authorise a valuation of the property (usually at no cost to the purchaser). It is only a valuation to ensure that the purchase price of the property is not over priced. The property has to be acceptable to the bank and built for human habitation. Barns for agricultural use or sheltering animals are generally regarded as unsuitable for mortgage finance as are wooden chalets and stone cabanons.
Finding the Property and Signing the Compromis de Vente
Properties for sale can be found in many different ways such as estate agent windows, magazines, property websites and notaires offices. When the property has been found and an offer has been accepted by the vendor, a buyer will be expected to sign a Compromis de vente (the sales agreement) and pay a reservation deposit which is usually ten percent of the purchase price.
Note: the Compromis de vente contains a get out clause (Clause Suspensive) stating that the property is being bought with mortgage finance and that the agreement to buy the property rests with being offered mortgage finance. Should the mortgage finance be declined, the buyer will not forfeit their ten percent reservation deposit to the vendor.
Once the Compromis de vente has been signed there is a seven day waiting period in which a buyer can change their mind about buying the property without incurring any cost. There will be a specified number of days during which a buyer should get their mortgage offer. This will normally be 45 days but can be as few as 30 days.
The Mortgage Procedure
Under French law, all mortgages are "full status" and a lot of documentation is required to support a mortgage application. Lenders are obliged to ensure that any person applying for a mortgage is financially able to meet the mortgage repayments.
Apart from a completed mortgage application form, life assurance form and a copy of the Compromis that has been signed by both the buyer and the vendor, photocopies of the following are required:
- Identity: birth certificate, passport, marriage certificate and divorce certificate if applicable
- Employed or receiving a pension - 3 months payslips, pension payment receipts or tax returns, proof of any other income
- Self-employed or director of your own company - at least 2 years trading accounts and tax returns
- Banks statements (3 months) showing receipt of income and payment of loans. Statement proving funds for the deposit to the mortgage
- Statements (one month) relating to existing mortgage(s), loans and credit cards and maintenance agreement if applicable
- Rental agreement (if living in rented accommodation)
- A statement of assets
When buying a "new build" or wanting to include the costs of works and renovation in a mortgage further documents are required:
- For renovation or improvement works: professional estimates or invoices from tradesmen registered in France together with a copy of their insurance certificate
- For property to be built: the property title or preliminary sales agreement for the land, building licence, the building contract and plans
- For re-finance or equity release: the title deed or loan deed with the complete repayment table
Life assurance is mandatory to cover all the terms of a mortgage. Most banks and lenders insist that their own in house policies are used and the medical underwriters may ask for medical examinations or tests.
When a file has been thoroughly checked and approved by an underwriter, the lender will request a valuation of the property. The valuation is not a survey. It is merely a valuation agreeing that the price being paid for the property and the amount the lender is prepared to lend is acceptable.
Should mortgage funds be declined, either because of financial information, medical underwriting or the unsuitability of the property, the lender will issue a letter which can be used as proof to have a deposit refunded as agreed in the Compromislet out clause.
Subject to everything about a mortgage application being acceptable, a mortgage offer (offer preable du credit) will be issued.
The rules about signing and dating a mortgage offer are very strict. There is a ten day cooling off period. This is a legal requirement and allows a buyer sufficient time to consider the terms of the mortgage before returning the documents to the lender by post.
Some lenders will want their arrangement fee paid on acceptance of their mortgage offer and the life assurance policy will by that put on risk from the date the mortgage offer is signed.
Sign and date the offer letter after waiting 10 days but before 30 days have elapsed. If the date is wrong, a new offer letter will have to be issued with another waiting period of 10 days.
When the lender sends the mortgage offer they also inform the buyer's notaire of the details of the mortgage. Completion date should be concluded within four months of receipt of a buyer's acceptance to the mortgage offer.
Mortgage Products and their Uses
In France, mortgages have in the main been used to purchase property or to fund improvement works.
A mortgage can be used to:
- Purchase a property which may or may not need renovation or improvement works
- Purchase a new property or one under construction
- Bridging finance - only available when selling a property in France to buy another French property and only if supported by a new mortgage
- Re-finance an existing mortgage on a French property and would like to reduce monthly payments and/or benefit from lower interest rates
- Replace a loan in another currency that you used to purchase a French property and now would like to pay it back and take out a new loan in euros
- Release equity from a French property
Choosing the right type of mortgage is essential.
Capital & interest repayment mortgage (variable rate)
Probably the most flexible of mortgage products. It's known what the repayments will be. The interest rate applicable to a loan is revised on a regular basis. Should interest rates fluctuate, repayments stay the same - only the term of a loan is affected. A rise in the interest rate will increase the term of a mortgage. A fall in the rate of interest will reduce the duration of the loan. There is a maximum of five additional years that can be applied to a mortgage. You are able to make lump sum payments or redeem a mortgage early without incurring any financial charges or penalties and you can change to a fixed rate at any time. However, if it is converted to a fixed rate a there will be a charge payable in the event of early redemption.
Capital & interest repayment mortgage (fixed rate)
The repayments can be fixed for either a short period of the mortgage or for the whole term. With the fixed rate period it's known exactly how much is to be paid each month and how many payments will have to be made. Fixed rates are usually higher than variable rates. Financial penalties can be charged for redeeming a mortgage early, or even changing to a variable interest rate. Each bank and mortgage provider will differ and it is advisable to check exactly what their financial penalties are.
The majority of interest only mortgages that are offered by the French banks are quite different and work differently; there are two products. With both products, the term of the mortgage is divided into two phases.
- During the first phase only the interest on the mortgage is paid
- During the second phase both the capital and the interest is paid
Because the capital is being repaid over a shorter period, during the second phase monthly repayments will be much higher.
The alternative product, a deposit is used as collateral which is estimated to grow at a set rate. Again the term of the mortgage is divided into two phases.
- During the first phase only the interest on the mortgage is paid. At the end of the first phase collateral is valued and is deducted from the amount originally borrowed.
- During the second phase the capital and interest on the outstanding mortgage is paid. Monthly repayments will be higher.
A pure interest only mortgage is possible, but not readily available to anyone as the lending criteria is very strict and the minimum lend is €100,000.
Equity Release Mortgage
Once virtually impossible, but with the increase in the number of international buyers, some banks have responded to the needs and requirements to those people who want to release some of the equity in their property. During 2005 and 2006 equity release mortgages were introduced and although many banks are choosing not to offer equity release, there is a growing number that are, and it is possible to release between 50 and 70 percent of the value of the property. The lending criteria is stricter than a straightforward mortgage to purchase a property, and there may be financial penalties attached with this mortgage. Each bank and mortgage provider will differ and it is advisable to check exactly what their financial penalties are.