Property purchase and mortgage loan in France: conditions and advices

Stimulated by low interest rates, demand for mortgage loans is not weakening despite the health crisis. However, to benefit from it, it is now necessary to respect strict conditions. Following the recommendations of the HCSF (French High Council for Financial Stability), the granting conditions have been tightened since the end of 2019 and each file is now being examined with great attention.

In an uncertain economic environment, lending money is risky for financial institutions and loans over 25 years old are hardly granted.

Personal capital contribution

A minimum personal capital contribution of 10% of the amount of the project excluding notary fees is recommended. However, this condition is not decisive but will be a real asset for having advantageous interest rates.

Debt ratio

In order to limit the risks, the debt ratio must not exceed 33% (more than a third of the resources cannot be devoted to monthly loan payments).  To respect this 33% effort rate rule and get your loan, it may be wise to increase your personal capital contribution or to take out the loan for a longer period.

Minimum income

The minimum income left once the monthly payment is paid is also an important point. This amount varies depending on the bank but if this latter considers that your remaining income is not sufficient, your request will be considered too risky and the loan refused. To avoid future difficulties, the bank also requests a financial leeway and residual savings (the ability to save once the monthly mortgage payment has been paid).

Annual percentage rate of charge and wear rates

Before borrowing, it is important to know the cost of the credit. To be able to compare the banks offers, it is necessary to base oneself on the annual percentage rate of charge (APR) and know the costs of the insurance, administration fees, expenses related to mandatory guarantees, etc. 

This APR cannot exceed the usury rate, which is the maximum rate at which a loan can be granted. This rate is set quarterly by the Banque de France. Good news, this rate is up slightly for the 4th quarter of 2020, now reaching 2.68% (for 20-years and more mortgage loans) after falling to 2.51% in the 2nd quarter of 2020, its lowest historical level, excluding many potential borrowers.

Work situation

The business sector in which borrowers work can be a bottleneck in the midst of the Covid-19 epidemic. The work situation of the borrowers is observed by banks and vigilance is required in sectors such as tourism, restaurants, hotels, transport, commerce, automotive and aeronautics industry and the arts community.  Before any real estate project, it is important to meet in a first place your bank or a broker to evaluate your budget and financing capacity.

The quality of the home purchased

Used as collateral for the loan, the sale of housing allows the borrower to repay his loan in the event of non-payment. The quality of the property as well as its location are criteria that banks take into account in order to resell at a good price the house or the apartment.

Regarding rental investment, banks have also tightened their criteria. They require personal capital contribution, provide shorter term loans and the rental income generated is less taken into account in the debt capacity. Having a solid case is very necessary, as well as an accommodation in an area with a real rental demand.

Before you begin looking at properties, you should be well prepared and be aware of your financial capacity and know the feasibility of your project.

 Using a broker can help. This intermediary accompanies you in the assembly of file. He is familiar with bank policy and will be able to advise you and direct you to the appropriate one. 

Loan conditions will remain strict until the end of the year and recommendations will be reassessed in December 2020.

References : Economie.gouv