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French mortgage rates hit an all-time low - should you buy?

French mortgage costs are at historic lows and borrowers there can access rates far more stable than those available in the UK. But recent tax changes have created hazards for British buyers - so is now a good time to buy in France?

According to property group Athena Advisors, competition between French banks to attract domestic borrowers has pushed mortgage rates to 0.25 points below those seen at the end of World War II.

What's more, non-residents can access these historic low rates with a 20 year fixed rate mortgage at 3.35 per cent and 20 year tracker mortgages from just two per cent.

French dream: Moving across the Channel is popular with Brits - with mortgage rates dropping, is now a good time to buy?

Nicholas Leach, from Athena Advisors, says: ‘The European Central Bank has remained stable so these new rates are simply down to the fierce competition between the banks for the best applications.

‘These are the best rates investors have seen for over 65 years so it’s no surprise we’re seeing investors choosing to lock in some long-term value in French bricks and mortar.’

John Busby from French Private Finance – a sister company to Athena Advisors – says the cost for a €100,000 loan has now dropped to €572 per month for a fixed-rate over 20 years, and €502 per month for a variable rate at two per cent.

Of course, investment companies talking up their chosen market is no surprise, so is now really a good time to buy in France?

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A report in August last year stated the French property market was in freefall, with estate agents and solicitors reporting sales of previously owned homes down between 17 per cent and 40 per cent in the eight months previous.

What’s the situation now? Well according to first quarter statistics from National Federation for Estate Agents (FNAIM) in France, some areas have seen prices slump by up to 10 per cent.

According to the map below, only one region – Midi-Pyrenees – saw positive growth in both house and flat/apartment prices since the first three months of 2012. 

Property prices: This map shows a regional breakdown of values in the first quarter of 2013, compared to 2012

The FNAIM also saw transactions towards the end of 2012 plummet 25 per cent due to the change in government with socialist leader Francois Hollande coming to power. Buyers and sellers were holding tight to see what happened to the market.

Athena Advisors said an Alpine development it marketed in February is now 65 per cent sold. Of this, 60 per cent have gone to UK buyers - this, it says, shows the demand is still there.

The mortgage deals on offer in France are extremely long-term compared to Britain. This side of the Channel, mortgage rates have crashed on the back of the £80billion Funding for Lending scheme, which has enabled banks and building societies to tap into cheap money.

This had led to two, three and five-year fixed rates to drop drastically. Deals in France are for 20 years.

 

Borrowers can grab a shorter term in France, but are discouraged to do so because there is a mortgage registration tax of roughly 1.5 per cent – this can potentially add a large chunk to the mortgage amount.

Many UK buyers that purchase in France are doing so to live there, enticed by the lifestyle, rather than as an investment.

Usually they will have 10-20 year plans and are starting a life in the country.

Another important consideration is tax. Overseas owners of French homes now face higher capital gains taxes (CGT) when they sell due to the addition of a 15.5 per cent social charge.

Previously, overseas owners from within the European Union (EU) had been in a better position than French resident second homeowners, who had to pay this tax which goes towards services in France on top of 19 per cent French CGT

Francois Hollande announced he would bring in the social charge for overseas owners as well last summer.

Those selling properties in France can offset CGT against the higher British rate of 28 per cent. Gains are be subject to the 19 per cent French charge and then difference to UK CGT, so a total of 28 per cent is paid. 

However, HMRC says that it will not be able to offset this social charge against it – delivering an extra 15.5 per cent bill on top of what they must already pay.

Many will not end up paying the full higher charge, as the complicated French system of taper relief reduces the amount that CGT and the social charge is levied on. This starts after six years of owning a property but was changed at the start of the year so that homes only become fully exempt after 30 years rather than the previous 15 years.

Owners pay the full amount for the first five years. Between year five and year 24 there is a four per cent annual reduction, then 18 per cent yearly between year 25 and 30. After 30 years of ownership, the sale of the property is exempt from CGT.

Additionally, if you buy a leaseback properties, known in France as Residences de Tourisme, you can reduce your CGT liability further. Leaseback homes are commonly bought by non-resident buyers and have been given beneficial tax status by the French Government as a means to boost tourism.

The tax break means that capital gain when a Residences de Tourisme is sold is reduced by the value of VAT - 19.6 per cent - which is added to the purchase price, despite the buyer not paying this higher value.

But even if you do get let off all your CGT by the French taxman, you should still be paying the rest in the UK.

Britain’s flat rate CGT is levied at 18 per cent for basic rate taxpayers and 28 per cent for higher rate taxpayers, however long you have owned an asset.

But the system adds your profit onto your annual income to decide whether you fall within the basic or higher rate tax brackets and then allows you to deduct your annual CGT allowance of £10,600.

In practice this means anyone making a decent sum from a property in France is likely to pay the 28 per cent rate.


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