The impact of interest rates on property purchases in France
15 February 2022
Considering purchasing a property in France ? These are the things you need to know.
Whether you are an existing resident of France or you are a prospective buyer of a french property, it is important to have a clear idea of the different possible costs of your real estate project.
Regardless of the type of property – whether it be a residential, commercial, or rental investment property – the listing price is only the tip of the iceberg of the final total cost. Your property purchase will include notary fees, real estate agency fees, and bank interest rates that must be factored into your budget for the investment.
The MR Agency Real Estate can help you identify these less visible expenses of your purchase. Brought to light, these facets will give you a clearer view of the final cost of your project.
What is an interest rate?
Interest rates are the percentages applied to money that is borrowed from a bank. Money is typically borrowed to cover the costs of large purchases, such as property, with the intention of it being paid back over time.
Interest rates eventually add up to the “price” of borrowing these funds. This makes interest rates directly contingent upon the amount of the original loan, the time it takes to pay it back, and other factors such as creditworthiness.
– Compulsory notary fees : These fees typically rest between 2% and 8% of the price of the property. These fees depend on the age of the property; lower fees for newer and unlived-in properties and higher fees for older properties. These costs are used to pay the town and the state where the property is located ;
– Estate agency fees : These amounts are typically an average of 5% (including tax) of the purchase price of the property ;
– Bank charges : These are required for the filing and the interest on the loan. When buying a property, there will undoubtedly be interest rates that your bank will ask you to pay for your loan.
The attractive interest rates in France
Nowadays, the average property interest rate in France is 1%. This is about an 8% decrease since the beginning of the 1990s, and, not to mention, infinitely more favorable for real estate purchases. It is important to note that banks choose to maintain rates at particularly low levels to prevent the conditions for granting loans from becoming more strict. Some of these pre-existing conditions include the loan duration having a maximum of 25 years, the average is 20 years, and a requirement for the debt ratio to not exceed 35% – the total of your debts divided by the total of your assets.
The vast majority of property purchases are financed by loans, and it is necessary to factor in this price from interest into your budget.
When taking out a bank loan, various costs are incurred. These costs include things such as application fees and insurance for the event of death, loss of employment, or any other factor that would prevent the borrower from repaying.
The bank may also require a guarantee. This guarantee can be from a private organization in the form of a payment, or it can be a mortgage on a property – whether that be on the future property or a property that has been previously acquired.
In order to budget for your property purchase, we advise you to compare the annual percentage rate of charge (APR) offered by the banks you are considering. [In French, “taux annuel effectif global” represented by the acronym (TAEG).] This rate includes all costs generated by the loan itself, providing a more accurate measurement of the total cost of the loan.
There are three different types of property loan offers in France, each mentioning the specific format of which it is regulated. Once chosen, the total cost of the specific loan can then be calculated, as it will include both the interest costs and the aforementioned additional costs. APRs (or, fr. TAEG) include any future expenses for the repayment of the loan making it a more comprehensive figure than a simple nominal interest rate. It is possible that a loan with a low nominal rate can ultimately lead to higher costs in the future, proving the utility of the APR.
What determines the interest rate of a loan?
Interest rates charged by banks depend on many factors:
– The duration of the loan : Often, the longer the loan, the higher the interest rate. Rates of loans are set by the European Central Bank based on market conditions ;
– The commercial loan policies : These policies typically differ across banks ;
– The geographical location : Rates vary depending on the location of prospective properties ;
– Creditworthiness : Your profile, debt level, professional, and personal situation ;
– Personal contribution:The amount you have contributed towards the overall cost.
All of these factors contribute to the risk of non-repayment. The bank calculates this risk in order to determine an appropriate interest rate to apply to the money lent in the loan.
Once you have submitted your loan, there are several repayment options. Interest rates are usually expressed annually, however, repayments can be made at different intervals – monthly, quarterly, half-yearly, or, less commonly, at the end of the loan period.
If it is preferred you have the option to continuously pay off your loan through constant amortization. This is often preferred by companies as it is the quickest way for them to receive their repayment. Constant amortization consists of paying a fixed part of the capital borrowed and paying a decreasing part of interest. Over time, the amount of each payment made to the bank would decrease.
Alternatively, you can repay in constant annual installments – this is the most common option. This option means that you pay the same amount to the bank each month, but the aging interest rate will affect the remaining debt over time.
If the interest rate falls during your loan period, you can make use of the early repayment clause. This clause allows you to pay off your previous debts or refinance them on more advantageous terms (although, it is possible that penalties may apply.) Additionally, with this clause, you may be able to reduce the number of installments left in your loan or the amount of the remaining term.
What about foreigners who want to invest in France?
As a foreigner it is possible to take advantage of these favorable French interest rates, however, you will be subject to greater restrictions than those of French nationality. Despite it being more of a challenge, it is still possible!
If you are a European Union national, the procedures are similar to those of a French national, and thus, more simple. However, if you are a non-EU national, your application is much more likely to be accepted if you are a long-term resident, or have a residence permit allowing you to work for at least four years. Presenting a residence permit with a long expiry date or being married to a French person may also work in your favor.
There can also be more restrictive policies depending on the country of nationality. For tax residents in the United States, for example, there is an act known as FATCA (Foreign Account Tax Compliance Act). This act requires banking institutions worldwide to cooperate with the US tax authorities, or else they will face financial penalties. The United States tax authorities require access to the banking data of any U.S. citizen whose foreign financial assets exceed $500,000.
In order to increase your chances of obtaining a bank loan, you must have the correct debt ratio, present a healthy and well-kept bank account, and have a stable and regular source of income.
As a foreigner, you will probably be subject to slightly higher rates than French residents, but it will always be dependent on the aforementioned factors.
If you are interested in purchasing real estate on french soil, there are tax arrangements such as Sociétés Civiles Immobilières (SCI). This is a legal arrangement specific to France, consisting of at least two partners. This entity may purchase a prospective property and allow each partner to obtain shares proportional to their contribution. This is an extremely beneficial opportunity, unique to the French real estate market.
Whether you are an individual or a company that is looking to invest, we will carefully follow your objectives and constraints to assist you every step of the way. If you wish to purchase a French property, do not hesitate to consult our France Feasibility Package.