French property - the financial issues

All change, please!

The first French property financial issue: If you’re planning to buy a property in France and the capital for your purchase is not held in euros, then exchange rates are going to play a very significant part in your life, at least until you figure out how you’re going to play the currency exchange game. Imagine: you live and work in the UK, and you’re paid monthly in pounds sterling.

You go house hunting in the Languedoc Roussillon and find the house of your dreams. You do your sums and price is right, but here’s a scary thought: every one cent movement in the euro (so we’re talking about the difference between €1.45 and €1.46, for example) will add – or reduce £1,000 (that’s one thousand pounds sterling) to the cost of a French home priced at €150,000. This is where the financial issues surrounding French property can really hit home. Given that the euro exchange rate moves an average of 3% every month (or so I’m reliably informed), it’s easy to see the effect - negative or positive - that exchange rates can have on the purchase of your French home.

I tell you, when I bought my current home in the south of France, the financial issues of buying property in France meant I gained grey hairs, lost brain cells and broke fingernails stabbing at my calculator on a daily basis, trying to figure out the difference between the purchase price of my Languedoc property, which was one thing, and the actual cost to me, which of course was quite another.

Price versus cost

As the buyer of a property in France, you need to appreciate the subtle difference between price and cost. This is one of the most important of French property financial issues to understand. Let me spell it out: the price of your French home will be in euros, and it’s the figure you agree with the vendor and which is stated on the initial sales contract. The cost of the property is the amount of pounds sterling (or whatever currency you’re using to fund your purchase) that will be eaten up buying your bricks and mortar. Obviously, the better deal you can cut changing your hard-earned shekels (sterling, dollars, whatever) into euros, the richer you will be.

Going grey overnight – how to avoid it

Exchange rates are like ants: they move around a lot. In fact, like ants, they pretty much never stay still, moving by the second, depending on supply and demand of the currency in question. Keeping track of these fluctuating rates is one of the key issues when purchasing French property. Remember, currency traders have an in-depth knowledge of the market, and a highly-tuned awareness of the trends that drive it. They follow rapid rate changes for a living, so you don’t have to. Here’s a tip from someone who tied herself up in knots over how many precious pounds were needed to fund her French property purchase: just buy your euros, and then stop thinking about it. Period. You’ve done your deal, and it’s over. Never mind coulda-shoulda-woulda. You have the dough: it’s time to move on and finalise the purchase of your Languedoc property.

Spot buy, or play the waiting game?

Here’s a question: would you agree to buy a property in your country of residence if you weren’t sure how much it was going to cost you? No, didn’t think so. So why would you buy a home in France, without fixing the exchange rate from the get-go? As French property financial issues go - this is a biggy. OK, so your strategy depends on where your sale funds are held (let’s assume we’re talking about UK pounds sterling), and whether you can get your hands on all of it from the outset (you could be financing part of your French property purchase by remortgaging your UK home, for example). If you have all your capital snuggly under your mattress, you have two choices. The first is called spot buying: you buy all your euros up front, fix the cost, and stop fretting about currency fluctuations. The second is called playing the waiting game: you hold off and see how the market moves. As the completion date creeps closer, you become obsessed with tiny movements of the euro against the pound, you worry yourself senseless about whether you’ll have enough money to actually pay for your dream home, and your fingernails get bitten down to the quick. Do yourself a favour: don’t go there.

Playing safe: forward buying

Don’t have all the money to hand for your French property purchase but want to play safe? Then a forward contract is the way… well, forward, actually. In other words, buy now, pay later. You purchase your euros now, paying a deposit (usually 10%) and the balance when the contract matures. Let’s say you want to buy £50,000 worth of euros but do not need to send them for three months. You agree the exchange rate now, put down a £5,000 deposit, and pay the remaining £45,000 three months later. If the exchange rate moves over the three month period (and the chances are it will), it will have no effect on you (unless you allow yourself to think thoughts of the “if only I’d waited for a better rate” kind, which is plain daft). What I mean is that the euro can go up, down, or sideways for all you care – you’ve purchased your euros at the originally agreed rate, and that’s that.

Playing the market

If you fancy yourself as a bit of a currency trader, good luck to you. You can wait to buy the euros needed to fund the purchase of your French home at some point between signing the initial sales contract, and the date that you have to put your money where your mouth is. When you feel the time is right, you buy – and pay for – all your euros in one go (a spot buy), or you fix a rate and take out a forward contract. Either way, you’re taking a risk. But maybe that’s how you like it. Me, I prefer to sleep at night.

French mortgages: The Rule

You may decide to buy your French property with the help of a French mortgage, so you need to know the rules. There’s one major rule imposed by the Banque de France when it comes to this French property financial issue, and all French banks and mortgage providers have to stick to it: only a third of your monthly income (and if you pay tax in France, we’re talking about gross monthly income minus the obligatory social contributions) can be used against the sum you wish to borrow, including the cost of the mortgage itself plus life assurance. If you don’t live in France, the minimum deposit you’ll have to put down to get a mortgage is 15% of the purchase price; you can include the estate agent’s fees in this if you like, but not the notaire’s fees, which are typically 8-10% of the purchase price for homes older than five years, and 5% of the cost of a brand new, never-been-lived-in property.

French mortgage paperwork

This being France, you’re going to need to supply plenty of financial / property paperwork to support your mortgage application in France. Chances are you’ll have to come up with the following:

• A completed mortgage application form plus life insurance policy form
• A copy of the signed initial sales contract (compromis de vente)
• Proof of identity (e.g. your passport)
• Proof of income (if you’re self-employed, you’ll need an audited copy of your balance sheets and trading accounts for the last three years, and your most recent tax return)
• Latest bank statements (usually three months’ worth)
• Most recent mortgage statement or tenancy agreement
• Most recent statements of any other loans, including credit cards
• Proof of funds to cover the mortgage deposit and notaire’s fees
• Written estimates from French-registered tradesmen for the cost of any renovations you want to include in the mortgage

Common sense (but worth saying anyway)

If you need to get a mortgage to buy a property in France, you really should shop around financially. Compare interest rates, terms and fees, not just in France but back home, too, wherever that may be. It’s generally accepted that if you’re going to take out a loan, it should be in the currency in which you’re paid; if your mortgage payments are in (say) sterling and your income is in euros, you’re running the risk of a devaluation in the euro against the pound (although things could work out in your favour if you take out a euro mortgage and are paid in pounds).

French mortgage terms

Endowment and pension-linked mortgages don’t exist in France (well, not at the time of writing this, they don’t); it’s repayment (i.e. capital and interest) or nothing, and French mortgages are usually limited to 70-80% of a property’s value. Mortgages in France tend to be for a shorter term (15 years is the norm) than in the UK, so your financial repayments for your property in France may be much higher. Interest rates can be fixed or variable, just like in the UK, and in most cases you can switch a variable rate mortgage to a fixed one, although of course there’s usually a redemption penalty for early repayment of a fixed rate loan. Once a French mortgage has been agreed, you’ll get a conditional offer, and according to financial property law in France, you can’t accept until a cooling-off period of ten days has elapsed. You then have (usually) 30 days to accept the offer and return the agreement duly signed; if you over-run the 30 days, you’ll have to apply all over again, and wait the ten days upfront as well.