FISCUS MORTGAGES - INFORMATION AND ADVICE

French Property Mortgage

PURCHASING FRENCH PROPERTY

As with much of France and its economy, there is a great deal of government regulation involved in the property market.

In France, the notaire is a government worker that is responsible for conveyance (the process of transferring legal rights of a property from one person to another) and will be appointed to represent both the purchaser and the vendor of the property. It is still possible to have your own legal representation, and indeed is advisable, as it guards against any problems in the legal process (and is particularly valid if you are not fluent in French).

Once a bid has been accepted by the vendor, a preliminary contract will be signed by both parties; the most common a Compromis de Vente, which is a binding contract. The purchaser will then have to put down a deposit of 10% of the purchase price, or 5% for newly constructed properties. The notaire (or the estate agent) will then hold these funds in suspense until completion.

When purchasing a property, if the finance is not in place to pay for the property, a clause can be inserted into the contract that stipulates the purchase is subject to mortgage approval. With this clause, you will be able to recoup your deposit should sourcing a mortgage fall through.

Once a mortgage has been secured, the balance of the property price is paid in full to the notaire on the completion date. The parties then sign the Acte de Vente, which is in essence the Title Deed.

Guide to Purchasing and Borrowing in France

FRENCH MORTGAGES

French mortgages can be obtained for the same purposes as a UK mortgages, so can be used not only to finance the property purchase itself, but other costs such as renovation and development.

The mortgages themselves will be in Euros (€) and are usually repayment mortgages although interest-only mortgages can be sought in some circumstances. The mortgage term works in a similar bracket to UK mortgages, with lenders offering loans with 5-25 year repayment periods.

Eligibility

When it comes to eligibility, French lenders will not consider any future rental income from the property in question when it comes to making a decision on whether the borrower will be able to repay the loan.

As a rule-of-thumb, add up your net income. Of this amount, 1/3 (one third) should be able to cover the Euro-denominated loan you have taken out and all existing outgoings. ‘Outgoings’ refers to existing mortgage repayments or rent, and any other debt obligations that require servicing, such as personal loans, credit card debt and hire purchase contracts.

If you are self-employed, you will be unable to benefit from a self-certification mortgage from a French lender. Your income will be calculated as the average of the previous three years’ net income. Any additional income streams beyond your direct line of business (income from investments) will also be partly factored into your overall income.

If on the other hand you are employed with a regular income, the mortgage value will be calculated using income declared on your wage slip and the monthly salary credit to your bank account. These documents will therefore have to be produced as evidence of your salary.

Mortgage Costs

In general, a deposit of 20% of the purchase price is needed for a French mortgage. On top of this figure, the buyer will be required to pay the legal and arrangement fees of the purchase. Most French lenders will also insist on life cover for the mortgage term. Once the mortgage has been agreed, the mortgage provider will pass on the funds to the notaire.

IMPORTANT TAX IMPLICATIONS OF PURCHASING FRENCH PROPERTY

There can be quite a few issues arising from purchasing a home in France. Stamp duty alone will set you back 4.8% of the purchase price on most properties. The most notable exception is the purchase of newly constructed properties, where you will only be charged stamp duty of 1% plus French VAT at 19.6%.

There are three annual taxes to consider. Many individuals are unaware of a wealth tax that is applicable to all French assets you may possess, including property, worth more than €720,000 (£479,808 using average exchange rate for March 2004). This levy must be paid, even if you are not resident in France, and this tax rate works around a bracket of 0.55% - 1.8% of the estimated asset value.

There are then the taxe d’habitation and taxe foncière to consider, which are similar to Council Tax paid in Britain. The taxe d’habitation is owed by the occupier of the property, and is owed on 1 January each year. There are some exemptions, such as for the elderly (over 60) and if the property is being renovated (and therefore has no occupiers). To be eligible for the latter exemption however, you must persuade the local council and the property cannot be furnished.

The taxe foncière is again due on 1 January each year, and is a land tax that is owed by the owner of the property. This tax is sometimes divided into two categories; a charge for the building and land directly around it, with another charge for any other land attached to the property.

To quantify these taxes, consider a property worth £500,000. Stamp duty on this property (assuming it is not a recently constructed property) will be £24,000. The taxe d’habitation and taxe foncière will vary depending on the region of France the property is in, but a combined tax bill of perhaps £1,300 would be a good ballpark figure.

Any income and capital gains should be declared, and the resultant French tax paid. If you rent out the property, there is a minimum tax of 25% of rental income for non-residents. You can, however, deduct any property expenses, most notably the interest on your mortgage for the property.

When it comes to selling the property, there is further tax to pay. A capital gains tax of up to 33% could be charged, however the longer you own the property, the lower this tax. If you have held the property for 22 years, any capital gains you benefit from will be tax free.

YOUR NEXT STEPS

If you have decided to purchase a French property, we would recommend that you speak to an Independent Financial Adviser (IFA) that can find the best deals on the market that are suited to your individual circumstances. If you would like to speak to one of our IFAs, please complete our quick mortgage enquiry form and we will have one contact you within the next 24 hours.