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Why taking out a French mortgage is smarter than buying in cash
Financially speaking, if it’s possible for you to buy a property outright, in cash, thus avoiding interest payments on a mortgage, you should do it, right? Well, not necessarily in France… Read on to discover why buying property in France with a French mortgage is the more financially savvy route, even if you can afford to buy in cash.
Not only are mortgage rates in France still extremely low, falling between 1 and 2.7% depending on the LTV ratio and the term of the loan, but they can be fixed for the entire duration of the loan, which can span up to 25 years. It is more financially savvy, therefore, to keep your cash invested, which, even for a cautious investor, delivers an annual return between 4 and 6%, and take out the mortgage at the much lower rate. For example, if the return for keeping your cash invested is around 6%, while your French mortgage costs you around 2%, you are still earning a return of least 4% by purchasing with a French mortgage.
Let’s say you purchase a property for €500,000 in cash. After 15 years, your property would be worth at least this amount. If you had bought with a French mortgage, however, with an LTV ratio of 85% at a fixed rate of 2.5% for 15 years, the €425,000 you’d invested would now be worth at least €765,400, based on a 4% return. You might have paid €85,000 in interest on the mortgage, but you’re still left with €255,400 you wouldn’t have otherwise. Remember, these figures are conservative. Although your mortgage rates won’t change over the duration of the loan, the interest you earn on your savings will if interest rates continue to rise, as expected. If, for example, rates rise to 7%, or your investments give you a 7% return, you earn an additional €662,468.
Paying less wealth tax
If you purchase your property with a French mortgage, you actually pay less wealth tax. This tax starts at 1/4 of a percent for properties at €1.3 million and only concerns the net value of the property. Thus, if you subtract your loan amount off of the total value of the property, you only pay tax on the remainder. This applies to residents and non-residents alike and is particularly beneficial if you are buying at more than €1.3 million.
Maintaining your savings
It is possible to take out a mortgage in France up to 12 months after the purchase date. So, if you’re worried a French mortgage will delay your purchase or weaken negotiations with the seller, you can buy in cash and then mortgage the property immediately after to take out the equity. You can even start this process before the final purchase to ensure you get the mortgage before the very strict 12 month deadline.
If you’re worried about timelines in general, it’s worth noting that in France, the purchase process takes anywhere from 3 to 6 months regardless of payment method. Timelines depend heavily, if not completely, on the notary, who has to follow and carry out many checks and procedures on behalf of the estate. This could take longer depending on the individual offices you are dealing with.
Taking out a French mortgage, in euros, for a French property, sold in euros, allows you to match the currency exposure of the asset. Mortgages denominated in euros also come with little to no early repayment charges. You pay off your debt in euros once the exchange rate returns in your favor. This can be especially helpful if you are buying when your native currency is weaker than the euro. By taking out a mortgage in euros, you only convert the deposit from your native currency to euros, rather than the full price of the property. Once this other currency has restrengthened, you can redeem your mortgage and convert whatever outstanding balance remains into euros at a much more favorable rate than at purchase. You can even increase your original cash purchase budget thanks to a combination of high LTVs and extremely low rates. Your property can also effectively pay itself off through renting. There are no restrictions on seasonally renting out properties in France.