Buy Now, Borrow Now, Before It’s Too Late!

Before you set out to purchase a property in France, you should understand how the the finances work. It’s not complicated, but it’s essential. Let’s take it step-by-step in the purchase process:

Step 1: AffordabilityDo you borrow the money or pay cash? How much cash do you have or are you 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.

* According to ceicdata.com/: “France’s Bank Lending Rate was reported at 1.54 % pa in May 2018. This records a decrease from the previous number of 1.58 % pa for Apr 2018. France’s Bank Lending Rate data is updated monthly, averaging 3.22 % pa from Jan 2003 to May 2018, with 185 observations. The data reached an all-time high of 5.63 % pa in Sep 2008 and a record low of 1.50 % pa in Dec 2017. France’s Bank Lending Rate data remains active status in CEIC and is reported by CEIC Data. The data is categorized under World Trend Plus’s Global Economic Monitor – Table: Bank Lending Rate: Europe and Central Asia. The Bank of France provides monthly Bank Lending Rate. Bank Lending Rate is defined as lending rate for Non Financial Corporations.”

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.

Here’s the bad news:

In France there are only a few lending institutions that specialize in mortgages designed specifically for non-residents, and even fewer for Americans. This is thanks to FATCA:

“The Foreign Account Tax Compliance Act (FATCA) is a 2010 United States federal law requiring all non-U.S. (‘foreign’) financial institutions (FFIs) to search their records for customers with indicia of ‘U.S.-person’ status, such as a U.S. place of birth, and to report the assets and identities of such persons to the U.S. Department of the Treasury. FATCA also requires such persons to self-report their non-U.S. financial assets annually to the Internal Revenue Service (IRS) on form 8938, which is in addition to the older and further redundant requirement to self-report them annually to the Financial Crimes Enforcement Network (FinCEN) on form 114 (also known as ‘FBAR’). Like U.S. income tax law, FATCA applies to U.S. residents and also to U.S. citizens and green card holders residing in other countries.” (Wikipedia.org)

The law, signed as part of the HIRE Act under Barack Obama, was an attempt to target undeclared offshore accounts of Americans, created to avoid their U.S. tax obligations. But, it has backfired on expatriates as banks around the world have denied U.S. citizens accounts and mortgages to purchase homes.

Crédit Foncier, Rue des Capucines Paris 1913 Crédit Foncier, today

One such bank, Crédit Foncier, has announced that it is closing at the end of this year. According to a press release issued by Crédit Foncier, it is “no longer either suitable or competitive, mainly because of an absence of banking customers and its exclusive refinancing on the financial markets.” According to businessimmo.com/, “This model turned against itself as interest rates fell and most of its clients renegotiated their loans.

“Crédit Foncier has announced that it will be taking applications till the end of this year. This is why we urge you to consider making a purchase and applying for a mortgage NOW.

Do you qualify?

1. Income

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.

2. Age.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:

1. Fixed rate

2. Variable

3. Interest Only

4. Combination Loans

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:
    
+   * Down payment 20% (some banks require a higher percentage)
+   * Agency fees if the buyer pays, vs the seller, approximately 5%
+   * Notarial taxes and fees, approximately 7% to 7.5%
+   * Finder’s fees, if applicable 2.5% to 3%
+   * Creation of an SCI, if applicable
+   * Incidental taxes reimbursed to the owner (unknown)=   Total cash approximately 30% to 50% of the price of the property.

A bientôt,

Adrian Leeds
Adrian Leeds Group

(by Susie Gott)

Respond to Adrian

 

 

 

P.S. If you have been thinking of making an investment in Paris property, take the plunge as prices are still on the rise and will even surely go higher! Contact us for advice and assistance on finding the perfect property and financing for you. Email [email protected] or complete our consultation form. Do it today!