Mortgage Update: “I have the cash…why should I use a French mortgage?”

Many of our prospective buyers have sufficient savings to buy their French property outright in cash. And yet they choose to take out a French mortgage in Euros. Why is that?

We look at five reasons why taking out a French mortgage might be a preferred option to being a cash buyer.

(1) Avoid currency fluctuations

Brexit, COVID-19, Trump, Boris…there are any number of reasons why in 2020/21 currency might move against you. The Euro/Dollar and Euro/Pound rates are not as favourable for French property buyers – mythical tales of people buying properties at 1.5 euros to the pound – those days are long gone. When purchasing a property in a foreign currency, unless you use a specialist currency broker like Moneycorp you might easily/inadvertently pay a premium when converting your cash.

By opting to take out a mortgage in Euros, you are buying in the currency of the property and postpone the need to move Dollars or Sterling into Euros at a depressing exchange rate. In the future, when the exchange rate moves in your favour, you can choose to pay off your French mortgage early (make sure the loan you take has little-to-no redemption penalties if you envisage this being a possibility).

(2) Reduce your French rental tax liability

If you rent out your property in France, any rental income must be declared annually to the French tax authorities. The French love a good ‘offset’ mechanism, so the good news is that you can reduce the amount of rental income you declare by offsetting the interest paid on your French mortgage. This only applies (obviously) to mortgages taken out in France in Euros – it will not apply where you have taken out a loan in your home country.

(3) Historically Low Interest Rates

Let’s be honest, money has never been cheaper (at time of writing – July 2020). If you have cash or investments tied up earning 3% to 5% why would you disinvest to buy your French property when you can borrow at under 2%? If you’re weighing up whether to release equity in, say, the UK or the US, bear in mind the Eurozone interest rates have historically been a couple of percentage points lower. Keep your capital in local investments in your own country and take advantage of low interest rates instead.

(4) Increase your budget with a French mortgage

Taking out a French mortgage to ‘top-up’ your budget means you may not have to compromise as much as you would do if you were paying in cash. If you’re not happy with the location, size or condition of the property your cash budget will get you, increase your spending power with a French mortgage and own a property that is right for you.

(5) Reduce or eliminate altogether your French “wealth tax” liability

The market value of any French assets must be declared to the tax authorities every year, even if you are mot resident in France. This includes property, cash, investments and valuables and the tax works on a sliding scale of 0.5% to 1.5% of the net value. The tax only impacts a minority of people as there is an automatic credit for the first €800k in asset value (net of any outstanding debts). If the value of your assets exceeds this, you can offset the market value of any property by the amount of capital outstanding on your French mortgage. Ideally this would then bring you below the threshold where this tax would apply.

Next Steps

We work with a number of partners – both lenders and specialist brokers – who are part of the FrenchEntrée network.

If you would like to explore your eligibility for a French mortgage, you can either contact us – [email protected] – or complete our initial mortgage enquiry form and we’ll get back in touch.