A French interest only mortgage is normally used as a French wealth tax planning tool. However, it is a standard French Mortgage Product called an in fine mortgage in French.
These mortgages are therefore better thought of as a French as a tax planning tool to counter ISF and not as a way to reduce monthly mortgage payments. Because of this they are very different to the Anglo-Saxon concept of interest only mortgages.
Eligibility for a French Interest Only Mortgage
If you want an interest only mortgage, you will need to prove sufficient wealth to the French bank.
The French bank will ask for a wealth statement, regardless of where you pay tax.
To qualify, you must have at least 150% of the mortgage amount in financial and property assets.
We can only accept as qualifying assets that are
- Not your main home
- Not the mortgaged property
- Unencumbered
Advantages of an Interest Only French Mortgage
The most obvious advantage is that monthly outgoings will be considerably lower than with a repayment mortgage. This is because you will only be paying the interest and mortgage life insurance each month.
If you are a high net worth individual there are circumstance when you my become liable for French wealth tax. This will normally occur because the value of your property in France exceeds the tax liability threshold. However, the threshold is triggered by net property value so by using an interest only mortgage you should be able to lower your net asset value below the threshold.
Disadvantages of an Interest Only French Mortgage
Firstly, the interest rates charged on interest only products are always higher than for repayment products. See our Mortgage Rates page for details of current rates.
Secondly, you will need to pass a bank net wealth test to qualify for an interest only loan.
Finally, your final mortgage payment will be for the entire amount of the loan. This will be no problem if you plan accordingly and provision the repayment. However, there are two fairly common sets of circumstances where we see these borrowers get into financial difficulties.
The most common problem is that the borrower just assumes that repayment will be so far into the future they can address the issue later. However, over the term of the loan your financial circumstances may change for the worse. What you initially saw as a manageable repayment sum may become impossible to repay, leading to repossession.
We see this most often in the case of divorce settlements under which the capital set aside for eventual repayment disappears. This can be particularly painful for the borrower because it is not normally possible to refinance an interest only loan.
Costs of an Interest Only French Mortgage
A interest only mortgages are available as either a fixed rate or variable rate products.
The interest rate on an interest only loan will be higher than the standard mortgage rate.
The maximum term for interest only products is generally shorter than for repayment mortgages.
A French interest only mortgage is not just a way to keep monthly payments as low as possible. So to qualify for a French interest only mortgage you will need to prove you can afford the repayments on an equivalent French Repayment Mortgage.
Finally, remember that you will need to budget to repay the lender at the end of the term. This can be quite a shock if you haven’t planned for it.
An alternative mortgage, for borrowers unable to meet the very strict bank lending criteria for an interest only product, is a French Hybrid Mortgage. These combines an initial interest only period which switches automatically to become a standard French repayment mortgage some years into the term.
