Financial Planning for Expats Dunhill Financial, SPRL International Financial Planners
For English-speaking expatriates residing in Europe who need assistance with financial planning, the Adrian Leeds Group recommends Dunhill Financial. To plan for your retirement, save for educational needs or arrange your estate, Brian Dunhill is happy to discuss your options during a telephone consultation or face-to-face meeting.
On April 21st, the Adrian Leeds Group will be hosting another one of our American Expat Seminars in Paris* with special guest Brian Dunhill of Dunhill Financial. Brian and I will both be speaking about the complexities of being an expat as well as the financial aspects of property ownership in France. While Brian will be discussing FATCA regulations, new estate tax regulations in Europe followed by a quarterly economic update, my goal is to inform participants on the basics of financing a French property. Let's call the 'course' "Financing French Property 101!"
Before anyone sets out to purchase a property in France, they should understand how the the numbers work. It's not complicated, but it's essential. Let's take it step-by-step in the purchase process:
Step 1: Affordability
Do you borrow the money or pay cash? How much cash do you have or are willing to invest? How much can you afford to pay monthly if you choose to take a mortgage?
Lots of people have savings to invest in property and prefer to purchase a property in cash to avoid a monthly payment. While on the surface that seems like a great idea, there are a number of reasons to take a mortgage aside from the obvious necessity for additional funds:
1. You may have other needs for your money! Perhaps you want to renovate to improve the property which will improve your return on investment.
2. Interest rates in France are lower than both U.S. and U.K. rates. At today's low interest rates, there are other investments which can yield higher dividends and therefore earn more money than the mortgage is costing you.
3. Investing as small amount of capital as possible is a way of leveraging a large mortgage that will be covered by the rental return of the property. As the years go by, your rental returns are likely to increase while your mortgage repayment remains the same, generating a higher return.
4. Any increase in the value of the property also increases the equity you've built. With a good track record, the lender may be willing to offer a second mortgage or equity release, facilitating additional property purchases.
5. A mortgage is a great way to reduce the tax liability on your French property by lowering its net value. With inheritance tax rates as high as one-third (to non E.U. residents) and wealth tax on assets in France over 1,300,000€, this can save an enormous amount of tax liability.
6. Interest paid on a mortgage in France is deductible on your U.S. tax return.
And one of the biggest reasons you will want to take a mortgage is...
7. The ability to more or less control the risk related to the fluctuating rate of exchange. If you take a variable rate mortgage, one which allows repayment with no penalty, you can use the rates to your advantage by making payments when the exchange rate is in your favor. The down payment, the taxes and Notaire fees paid at closing are the only amounts subject to the current rate of exchange. And even that, with good planning a currency specialist can further protect you from the risk. "Forward" contracts allow you to buy Euros up to two years in advance to protect yourself against these currency fluctuations.
In France there are lending institutions that specialize in mortgages designed specifically for non-residents. Now that we've convinced you to take a mortgage, do you qualify?
Loans are income based and as such, existing assets do not play a role in determining how much one qualifies to borrow. That amount is calculated as the difference between the current debt service ratio (current monthly obligations as a percentage of monthly gross income) and a maximum of 33%. In other words, the new monthly mortgage payment, when added to existing monthly obligations cannot exceed 33% of gross income.
Net rental revenue on existing investment properties may be considered as income as would investment income. Consumer debt (credit card balances), taxes and insurance premiums are not deducted from gross income. Car payments, other mortgages, rents and other debts are deducted from gross income.
The maximum term of the mortgage is calculated roughly as 75 yrs less the borrowers age. A mandatory life insurance policy, valid for the term of the mortgage, secures the loan. It is national law that requires all property to be secured by a life insurance policy so in the event of the borrower’s death, the property is free and clear for inheritance purposes.
The policy must apply specifically to the mortgaged property. Normally, the policy is provided by the lender’s associated insurance company. The borrower must complete a medical questionnaire and often undergo an exam to qualify for the insurance and therefore the loan.
Traditionally up to 80% of the appraised value of the property. The lender will appraise the property at no cost to the borrower. The mortgage will not cover the Notarial taxes and fees, nor will it cover the agency fees.
The mortgage can cover renovation, however the lender will provide up to 80% of the estimated value of the property after renovations, based on renovation estimates from contractors.
There are several types of loans available, but each lender offers a variety of different products:
The current interest rates are based on the Euribor plus margin -- often 3-month or 12-month. The Euribor is the money market reference rates for the euro.
Lenders will accept applications prior to purchase of a property, but will provide a “pre-approval in principle” only, estimating the applicant’s borrowing power.
Those on the title deed of the property are held responsible for repayment of the mortgage. Your payments will be automatically deducted from your French bank account.
You can deduct the interest portion of the loan on your U.S. tax return, but we recommend you consult your accountant or tax attorney for advice.
Step 2: Cost of Entry
Closing costs and your total cost of entry can be outlined simply:
* The price of the property not including the agency fees less any amount borrowed + * Agency fees (normally approximately 5%) + * Notarial taxes and fees (approximately 7%) + * Finder's fees, if any (normally 2.5%) + * Incidental taxes reimbursed to the owner
= TOTAL CASH
For example, a 50 square meter apartment might play out like this:
With Mortgage Without Mortgage Cost of Entry Number of M2 50 50 Assumed Price per M2 €10,000 €10,000 Apartment Price €500,000 €500,000 Notarial taxes and fees 7% €35,000 €35,000 Loan origination fee (will vary) €1,500 €1,500 Finder's Fees 3% €15,000 €15,000 Down payment 20% €100,000 €500,000 Renovation and Furnishings €2,500 per m2 €125,000 €125,000 TOTAL COST OF ENTRY €276,500 (55%) €676,500 (135%)
Step 3: Carrying costs
The carry costs of a property in France are very low, particularly the annual taxes and the homeowners association fees.
Annual cost of ownership not including mortgage payments:
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