Financing a property purchase in France and pitfalls
At the time of writing travel is still severely limited across both sides of the Channel, and many of our readers looking to buy their dream holiday or forever home in France will undoubtedly long for the days when they will be able to travel to France again to resume their search.
Until then, prospective buyers can still plan ahead; and a key aspect is to consider how the French property will be financed.
It is perhaps useful to comment that a French property buyer will of course pay the purchase price which may or may not include the agent’s commission, but will also be responsible for the ‘Notaire’s fees’ consisting of the French notary’s remuneration as well as various taxes and fees, which will add an additional 7 to 8% to the cost of purchase.
As in the UK, intervening parties such as estate agents and Notaires need to investigate the source of funds in a property transaction and must report any suspicious activity to the French anti-money laundering agency (Tracfin). The agency has increasingly tightened the grip in recent years so cash buyers should not be surprised if their agent asks them to justify where the funds come from and provide evidence in support. As the agent would be required to make a declaration of suspicious transaction in the absence of such evidence, it is always advisable to co-operate.
Notwithstanding the above, a cash buyer will always be in a strong position since there is good reason for the seller to believe that the transaction is likely to go through to completion.
A binding contract will be in place once the parties have signed the initial contract (compromis de vente) and on expiry of the buyer’s ten-day cooling off period. At that stage, the parties can expect to complete when all conditions are met and the pre-completion searches are completed.
Whilst this phase can last 8 to 10 weeks following signature of the contract -or even longer-, once completed, the Notaire will invite the parties to attend a completion meeting and completion usually takes place within 3 to 2 weeks from then on. At that stage, the buyer will receive a request to transfer the purchase price (less the 10% or 5% deposit already paid) and notary’s fees to the Notaire’s account.
If a buyer is unable to transfer the funds and complete because the funds are not yet available, his seller would be entitled to claim the contractual 10% indemnity from him as well as additional damages; the buyer can even be taken to court and be forced to complete the purchase.
If a buyer proceeds on a cash basis, it is therefore of paramount importance for that individual to ensure that the funds are available on request and not rely on a pending investment, shares to be sold or a sale to take place before completion; especially so in unpredictable times such as the ones we are living in.
Sale of UK property
Most readers who are looking to move to France on a permanent basis will instead use the sale proceeds of their UK home to reinvest into the French property purchase.
Whilst property chains are very common in English conveyancing, the concept does not really exist and cannot be easily replicated in France as it will invariably take a few days for the sale proceeds of the UK property, once converted into Euros, to reach the French Notaire’s account. The Notaire will not able to complete on the French purchase until he or she receives from the buyer the full purchase price and fees into their account, so a buyer in this situation would be wise to arrange temporary accommodation for a few days at least.
Another timing issue stems from the fact that the French equivalent of exchange (the signature of the initial contract / compromis de vente) will happen before the pre-completion searches are carried out, which is in stark contrast to the English conveyancing system where the pre-completion formalities take place before exchange. Unlike in the UK, where the gap between exchange and completion is generally very short (usually one to two weeks or even less), the French conveyancing process is such that buyers commit themselves to the purchase weeks if not months before the actual completion date.
This means that a French property buyer who relies on the sale of his UK property in order to finance the purchase would find himself in a very precarious situation if the sale of the UK property were to fall through between signature of the initial contract (compromis de vente) and completion. This could potentially have serious financial repercussions if the UK property cannot be sold before completion of the French purchase, as already explained above.
One way to mitigate this risk would be to ask the Notaire to insert a specific condition precedent within the initial contract to make the French purchase conditional on the buyer being able to sell his UK property before completion. This, of course, would be subject to the prior approval of the French seller. Also, the French Notaire could have grounds to resist the insertion of this condition, especially if exchange in the UK property has yet to happen, and there is pending uncertainty of the UK transaction. So, buyers in this situation need to check whether it would be possible to have this additional condition inserted in the contract, although they should always first explore selling their UK property before embarking on their French property purchase.
French lenders typically offer low interest rates, which has attracted many British second-home buyers to the French property market.
French property buyers applying for a French mortgage will be protected to a certain extent since they will have the benefit of a finance condition in the initial contract, which will allow them to withdraw from the purchase without penalty if they are unable to obtain a mortgage offer matching certain criteria set out in the contract.
Buying a French property with a mortgage may also be a good investment for high net worth individuals since only the net value of an individual’s immovable estate is taken into account for French Wealth tax purposes.
However, buyers are potentially required to obtain life insurance for any loan – usually when the loan to value ratio exceeds 50% of the purchase price, and therefore need to be aware that any ill health or pre-existing condition may affect their mortgage application.
Also, for interest only mortgages, buyers may be forced to sell the property if they are unable to repay the mortgage in full at the end of the term so the choice of product needs to be carefully considered.
As a final consideration, in a post Brexit world, British residents would be well advised to contact a reputable French mortgage broker specialist to check whether, as non EU-residents, their borrowing requirements and capacity with French lenders has changed.
A joint property purchase certainly is very common and in some cases perhaps the only way one can achieve becoming a French property owner. It would of course be sensible for each buyer to obtain estate planning advice from a cross-border specialist beforehand; and also find more information as to their rights and obligations as future owners of a French property.
The decision to buy on a joint basis is not to be taken lightly. Whilst a bonne entente may exist between joint buyers at the time of purchase, it is never advisable for a buyer of a French property to fund the other buyer’s share as this can lead to various complications in case of a breakdown of relationship between them in the future.
As an example, if a joint owner / borrower suddenly refuses to contribute to the mortgage repayments, this could leave the other owner unable to meet the mortgage repayments and, potentially, force the sale of the property.
Also, the buyers will need to confirm to the Notaire their choice of ownership structure and share of ownership before completion so that the title deed of the French property reflects their decision. The default structure of property ownership in France is ownership ‘in indivision’, which is similar to the English tenancy in common and means that each joint buyer will usually buy and own half the property (although it can be in different shares).
Regardless of the finance options we explored in this article, the shares of ownership must be an accurate reflection of the financial input of each buyer.
For instance, if the property is then sold, the Notaire must redistribute the sale proceeds in accordance with the owners’ share of ownership as described in the title deed; and whilst an aggrieved owner may try to prove that the funds on purchase came from him rather than the other buyer, it would be very difficult to prove it; and it could have significant tax implications if it is retrospectively classed as a disguised gift.
All these risks must of course be considered and addressed early on in the process, so, if you are looking to buy a property in France in the near future, now would be a good time to think about your options, and the potential pitfalls.
This article first appeared in French Property News – April 2021.
How can we help?
If you have an enquiry or you would like to find out more about our services, why not contact us?