Mortgages - French Mortgage Providers

The lending criteria used by French mortgage providers varies from systems used in the UK and Ireland. This often leads to confusion over the amount that British purchasers can borrow in France.

There are three key criteria used by French lenders that UK and Irish purchasers need to bear in mind:
1) the maximum loan-to-value ratio (LTV) offered, as this can vary depending on the type of purchase
2) their own personal ‘debt ratio’ calculation
3) the standard income-multiple borrowers can expect.

These three elements of French mortgage affordability can vary slightly from bank to bank and although some of the criteria are aimed specifically at overseas purchasers, the majority also applies to French nationals.

The difference in the lending criteria used by French and UK/Irish lenders runs parallel to different perceptions of debt in these countries. On the one hand, in the UK, we talk about ‘leveraging up’ a property purchase, and think nothing of taking several mortgages while having a balance on a number of interest-free credit cards or car loans. In France,however, loans, overdrafts and credit cards are not even always available, and are generally not used unless absolutely necessary and as a very short-term solution.

For example, while credit cards are widely available in the UK and customers can defer paying for their purchases for months if not years, in France very few consumers use them, and even when they do, the customer’s account will be debited within 30- 60 days of the purchase. There is no opportunity to accumulate a large balance and choose only to pay the interest as the debt must be cleared within 30-60 days. French Consumer Law is strict in this way to avoid its nationals (and non-nationals) taking on too much debt. Knowing this background helps English-speaking property purchasers understand why French lenders tend to be more conservative with the mortgage amount they will offer.

Maximum loan-to-value ratio offered by French lenders
The loan-to-value ratio expresses the amount of loan as a percentage of the total value of the property. Most French lenders will offer up to a maximum of 80% LTV (on the valuation price or purchase price depending on which is lower) to UK and Irish residents. This leaves most borrowers requiring a 20% deposit and additional funds to cover the legal costs of purchasing property. However, a number of lenders offer up to 85% LTV on secondhome purchases and between 85- 100% (sometimes including legal costs) on certain investment purchases.

Income-multiples and the ‘debt ratio’ calculation
The strictest stipulation of French lending relates to the everyday financial outgoings of the borrower. While lenders will offer up to four times the borrowers’ provable income, the amount they are prepared to lend is affected by a calculation of affordability that is more restrictive than methods used in the UK.

French lenders will calculate a ‘debt ratio’ for each borrower based on their income in relation to all the contractual financial outgoings they have. This means that all payments being made by a borrower, including mortgage, car or bank loans, credit card repayments, hire purchase loans and child maintenance, will be measured against their monthly income. On the whole, lenders will not offer an amount that would make the borrowers’ debt ratio exceed 33% of their income, but a number of lenders have become more flexible over the past year, offering higher mort-gages by increasing their cut-off to 40% in some circumstances.

The income used for debt ratio evaluation usually takes into account all income from employment or pensions and a certain percentage of investment and rental income. Borrowers should be aware, however, that some lenders only take into account net employment/pension income for this calculation, rather than gross. Furthermore, some lenders do not take into account any future rental income from the property being purchased.

French lenders will also take into consideration the borrower’s personal situation outside of their debt ratio calculation. So, if your outgoings are low as you are currently spending nothing on accommodation (i.e. relying on a partner, living with parents), French lenders may question the security of the arrangement, and allow room in their calculations for any potential living costs you would incur if you were to move out. On the flipside, the debt ratio used for high net worth borrowers or borrowers providing a deposit of more than 40%, is usually more flexible.

Equity release mortgages
UK or Irish residents who already own property in France, bought using funds from home (savings, domestic loans etc), can apply for a French equity release mortgage for which the lending criteria used will be similar to the above. The amount of equity released from the property will still not exceed four times the borrowers’ total annual provable income, and the lenders will use the same debt ratio calculation. However, the amount of equity offered will not normally exceed 70% of the property value in this instance.

How to find the best deal
The most important thing when securing a French mortgage is to seek specialist advice early on. If you intend to apply for a French mortgage you should make sure that a specialist overseas finance advisor calculates your debt ratio for you. There are so many nuances to this calculation it is best for an expert to work it out to ensure it is precise.

A specialist overseas mortgage broker can advise purchasers to apply to one of the more flexible lenders if their debt ratio is ‘borderline’, i.e. reaching the 33% mark.

If purchasers know which French banks to apply to in advance they can avoid disappointment and wasted time approaching local banks only to be told they do not fit their particular lending criteria.

Furthermore, experienced French mortgage brokers know how to present a mortgage application in the most favourable light and how best to negotiate with French lenders to secure the largest mortgage amount possible with the best terms and conditions.

As long as buyers take the time to seek good advice, the differences in lending criteria in France should not become a show stopper to your intended purchase.

• Katy Hepworth, Overseas Mortgage Manager, Assetz Finance Tel: 0845 400 8000. www.assetz.co.uk

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