French mortgage market picks up

The French mortgage market has picked up over the past four weeks with many banks adjusting their rates downwards and changing product lines.

Specialist mortgage provider French Private Finance says that it has seen the number of enquiries increasing across the board as would be buyers look to take advantage of the low rates.

 

‘Recently, we have seen many more bankers buying in France and to enjoy the value offered by the long term fixed rates as a hedge against inflation. As we all know the size of government debt across Europe is mind boggling. The bankers think that the governments may try to inflate their way out of this problem, as they have in the past, using policies that encourage inflation,’ said director John Busby.

 

‘You can see the incentive for the government as, if they can maintain an inflation rate of near to 5% (or god forbid higher) the value of their debts is decreasing each year by that amount. The compound effect of a rate of inflation of 5% over 20 years is to make the value of the outstanding loan drop by 65% Now that’s an easy way to pay something off,’ he explained.

 

‘The best way for you to emulate this strategy by the government would be to get a long term fixed rate interest only mortgage. Unfortunately such loans are normally not available in the UK. In France, however, 15 year fixed rates can be found at 4.3% for 70% of the purchase price. Your next best option would be to get a repayment (capital and interest) fixed rate mortgage for 20 or 25 years which come in at 3.6% to 3.75%,’ he explained.

 

He added that after you deduct the current inflation rate you are only really paying about 1.5% to borrow the money at the today’s rate of inflation. If the inflation rate goes up beyond 4% you will effectively be paying no interest on the loan, the real value of which would also be decreasing dramatically.

 

‘It is these options which have got those in the finance industry looking seriously at the French property market. Many of us have a strong desire to own a property in France and the current mixture of ultra low long term rates and soft property prices with the promise of inflation and higher rates with increases in property prices to come in future, make an excellent case for investing,’ said Busby.

 

Under proposals put forward by the French government the Scellier law is to be replaced by the Duflot law. From 01 January 2013, individuals who buy a new property for rent will benefit from a tax deduction equivalent to 18% of the amount invested to a limit of €300,000. The tax deduction will be spread over nine years. To take advantage of this fiscal advantage, landlords will have to lower the amount of the rent of their flats by 20% compared to the average price of the market.

 

The new system will apply to homes situated in Zone A and Aa, that is Paris and its suburbs, a part of the French Riviera and the French Genevois, some cities located in Haute-Savoie, Var and Alpes-Maritimes, B1 which is urban areas with over 250,000 inhabitants, Corsica, some Paris suburbs, and small towns. Cities in the B2 zone may also be included if they have more than 50,000 and less than 250,000 inhabitants, subject to the authorization
of the local government prefects.

 

To generate a bigger turnover, taxes in capital gains will be temporarily reduced, excluding principal residences that will remain exempt. A further discount of 20% on the CGT bill will be given to the owners who sell their property in 2013.

 

Currently, capital gains tax is 19% for the first five years of ownership to which  social security contributions of 15.5% are added,  making the effective tax rate 34.5%.

 

At the moment, the property owner receives a discount via taper relief of 2% per year between the sixth and the seventeenth year of ownership, followed by 4% per year after the seventeenth year, and finally 8% annually after twenty four years which lead to a total exemption after 30 years.