It seems as though North Sea haddock aren’t the only ones causing problems since January 1st.
There have been some reports that French banks are now imposing stringent rules on UK residents getting a mortgage in France. It’s the numbers that have made the headlines. Each borrower ‘will need to earn at least £150,000 per year and in some cases have £500,000 in net assets’ even to borrow just €200,000.
But what is really going on here? We talked to John Busby at French Private Finance.
“In reality, it’s only one bank that has made this a requirement and these conditions need only be met if the property isn’t going to be a primary residence or rented out,” said Busby. “Whereas some banks, like HSBC, have stopped lending to Brits altogether.”
At Athena Advisers, more than 95% of our clients choose to rent out their property to generate income and more than 80% opt to do this in order to take advantage of tax breaks, such as VAT recuperation. Twenty percent is no small sum.
So who are these conditions really affecting?
“The market is currently split in two,” adds Busby. “Those financing properties priced above €1.5m are generally fine as they’ll be using high-value retail banking mortgages or private banks, where additional capital is placed under management with the bank as collateral. For those purchasing a property under €1.5m there are still options, but it is now more difficult and will take longer.”
Reading between the lines, if a buyer is not planning on renting the property out and it is not going to be their main residence, then it’s really only going to be used for short hops or extended stays. Generally, those buying in areas of higher tourism, such as Paris, the French Alps or the South, almost always rent their property, so the type of French property buyers this affects the most are those targeting lower-priced properties in regional and less touristy areas.
“If you’re looking for €300k of lending on a property in rural Dordogne and you don’t intend on living there, it’s going to be very hard to find a solution over the next few months.”
What has been the catalyst for these market difficulties?
“The main problem is that the UK doesn’t have a financial equivalency agreement with the EU yet,” continues Busby.
In case you didn’t know, a financial equivalence agreement recognises the regulations of the third country as compliant with, and equivalent to, the EU’s own, allowing firms (including banks) from both the EU and the third country to operate within the territories of both. “Brexit has caused banks to look at lending and it’s down to a lack of understanding over regulations.”
UK residents wishing to obtain a mortgage for a second home in France will have to be able to demonstrate that they satisfy the conditions to be classed as a high net-worth or high-income individual, unless they are purchasing their primary residence or a property which will be mostly rented out. UK citizens who are tax resident in France will not be affected.
The other problem is that, in some ways, there’s not a lot of money in the French mortgage market. “The financial system, as well as the French government, enjoys the long term security provided by having extremely low long term fixed mortgage rates for both domestic and foreign buyers,” adds Busby. “This is why France has never had a property bubble like the UK or US, but the problem is that banks don’t make a lot of money from non-resident mortgages.”
Without feeling sorry for the banks, it’s true. If the average rate for a non-resident on a normal 20-year fixed-rate mortgage in France is 2.00%, there isn’t a huge margin for the bank over such a long term. It’s worth remembering here that the average 5-year rate in the UK is not far from this, around 1.80%, but that is fixed for only five years, not 20. In fact, recent data from Moneyfacts.co.uk has revealed the average rate across lifetime mortgages in the UK has just dipped below 4% for the first time in its records, so, broadly speaking, French rates are half that of the UK.
“For French buyers, mortgage rates are even lower, but French banks provide lots of other services where money can be made, such as insurance, credit, investments, savings, wealth management, as well as pushing third-party services like travel insurance,” continues Busby. “With the non-resident market, they don’t make money from these services, so over the past few years we’ve seen fewer options out there for non-resident buyers at the lower price levels.”
“Now it’s mainly the smaller branches that are doing the international business and whilst you can secure really good deals, your mortgage application has to compete with all the other types of transaction the banker is dealing with, meaning this type of application can take much longer. It’s really important with smaller local branches to use a broker to push the deal on as they know the people that are sitting behind the desks.”
Indeed, from our own experiences at Athena Advisers, we know that many French banks will now only work with UK brokers that have an EU entity and are authorised to broker credit on both sides of the channel.
What’s the key takeaway?
It appears the days of buying a €300,000 French property with an LTV of 80% are over, at least for now. And if you’re looking at a French property south of €1.5m, finding finance is going to be more difficult over the next few months. “We’re speaking with the banks every day and solutions will come, they’re just going to take some time.”