July 2009: French Property & Mortgage Watch

• French property prices rise by an average 3.9% during Q2 2009
• Q2 resurgence brings year to date market fall to a reduced -2.5%
• Numbers of French mortgage enquiries up 42%
• Britons remain the largest number of foreign buyers in France

The French residential property market is showing encouraging signs of stabilization after the market shock caused by the global financial and economic crisis. On average, prices rose by 3.9% during the second quarter, resulting in a total annual return to July 2009 of -2.5%.

Much of the market’s resilience is due to the prudent lending criteria that have been in effect for many years: in France, lenders do not allow borrowers’ total outgoings on finance payments to exceed one third of their total gross monthly income. This way the bank can be sure that any change in circumstances does not precipitate immediate financial problems and that the borrower will continue to be able to make the monthly repayments.

In effect, the prudent lending has allowed for a continuing availability of mortgage finance in France and this has kept the overall drop in prices modest. While mortgage finance in the UK remains difficult to secure at higher LTVs, the French banks continue to lend to borrowers with smaller deposits, even up to 100% LTV.

The buy to let sector in France is attracting particular interest from investors at present, as price falls have boosted gross yields. The average annual gross yield in France is currently 5.6%*, which compares to 5.1%** in the UK as a whole and 3.79%*** in London.

Popular areas include the medieval town of Troyes in northeastern France, with average gross yields of 6.3%, Perpignan in the South East with a gross yield of 6.2% and Chateauroux, in central France, where gross yields are averaging an exceptional 8.5%.

John Luke Busby, director, Athena Mortgages, comments: “For second home purchases, the French property market is stabilizing and a degree of normality has returned. However, what has changed is that while, in the past, the majority of British buyers opted to finance their French purchase in the UK, very competitive interest rates, the lower sterling/euro exchange rate and the availability of French funds are seeing more people opt for a French mortgage to buy their second home.

“Similarly, many buyers are opting to borrow more in France rather than take out an equity release mortgage in the UK. Overall, with people selling in some of the better areas to take advantage of the stronger euro, the market is quite buoyant. In the second quarter of 2009, we’ve seen a 42% rise in the number of mortgage enquiries compared to the first quarter and a 22% increase on the second quarter of 2008.

“Particularly attractive to UK investors seeking to buy a second home in France at present is a 100% LTV euro loan fixed at 4% (capped at +1/-1) for 25 years. For anyone seeking guaranteed payments and peace of mind for the lifetime of their mortgage, this represents exceptional value.

“Leaseback purchases are also popular with investors looking to lock into low interest rates and improving guaranteed yields. With the VAT rebate on new build leasebacks, investors can often finance 100% of the price of the property with a euro loan, covering only the closing costs — stamp duty, bank fees, mortgage registration costs, for example — from their personal funds. However, these can also be included in the loan on some repayment mortgages.”

Some of the new mortgage options with fixed monthly payments that can only increase by the rate of inflation are also proving attractive to borrowers, with the added benefit of rates starting from less than 3%.

On one product, available at an LTV of 99% on new build leaseback developments and 85% on standard properties, the initial rate is fixed at 2.85% for three months. After this it reverts to Euribor + 2.45% for the remainder of the term (with a current pay rate of 3.45%).

Crucially, though, if Euribor rises, payments are capped at the rate of French inflation and the difference is added to the loan amount, the term of the mortgage being extended by up to five years rather than repayments increased.

The mortgage has a maximum term of 30 years and there are no early repayment charges. There is a 24-month deferment period on repayments and it is also available for refinance and equity release purposes.

John Luke Busby concludes: “Taken as a whole, this is easily the most competitive and flexible French mortgage product we have been able to offer. Not only are repayments capped at the level of French inflation, which provides important peace of mind ratewise, but they are further hedged by an automatic mechanism that extends the mortgage term by up to five years.

“Given that most clients tend to sell within the term of the mortgage anyway, the added interest payable over the full term of the mortgage becomes immaterial. Also, in the case of French leasebacks, as the owners usually have an index-linked rental income, any monthly shortfall will stay more or less the same. This product has been launched at a time when the French property market is being stimulated by a range of favourable Sarkozy-led tax incentives and we expect it to be very popular with clients.”


*** Knight Frank Prime London Investment Index — June 2009

About Athena Mortgages
Athena Mortgages is a close-knit, multi-lingual team with significant experience in the French property market. We have helped thousands of clients find the best available mortgage for their French property. We work closely with many French property developers, who choose us for the clarity and simplicity of our presentation. We continue to search for the best deal for our clients right up to the day of transfer of the property. We pride ourselves on professional service and dedication to finding the best offer until the date of signature. We are happy to welcome clients at our offices in London and Paris.

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