French Leaseback Mortgages are for the purchase of a buy to let property where the rental is guaranteed under a leaseback contract.
Look for French leasebacks in popular tourist locations, both coastal and inland. Also, look for leaseback opportunities in big cities as University student lodgings. For both types of leaseback, mortgages are the usual means of finance.
You can use leaseback mortgages to purchase villas, townhouses, apartments or chalets, depending on location.
Your French leaseback property is a freehold property which you own outright and lease back to a management company. The return is a guaranteed index-linked income during the leaseback period, which is usually 9 years. Furthermore, with some schemes you can reserve some weeks for your own use or benefit from discounted rental. Most importantly, the management company takes care of finding rentals and looking after your property.
You can include future income when applying for French leaseback mortgages. Because the projected income is guaranteed by the developer it qualifies as allowable income.
You can reclaim the TVA / VAT charged on the purchase for qualifying developments. Furthermore, you can claim the interest charges on French leaseback mortgages as a business expense.
Advantages of French Leaseback Mortgages
Firstly, you can take French Leaseback mortgages for qualifying French leaseback property with a guaranteed rental contract. Usually, the guaranteed rental income yield exceeds the interest payable on French leaseback mortgages.
You purchase French leaseback property decorated and fully furnished, including white goods, so it’s ready to let.
The management company pays for maintenance of the property and the furniture, including replacing breakages.
The management company takes responsibility for marketing, maintenance, changeovers and paying you rental whether it finds customers or not. They also pay the running costs, such as insurance, water, waste disposal and electricity.
There are no management charges to pay.
The developer will normally index-link rental income, usually to the INSEE Cost of Construction Index.
The Disadvantages of French Leaseback Mortgages
If you sell a leaseback agreement you may need to repay a proportion of the VAT already reclaimed.
Capital gains tax may be due when you sell a leaseback property.
A French leaseback is a long-term investment, but the income guarantee is for a shorter period.
French leaseback mortgages are only available for the properties built by the best developers. The individual owner has no choice in the selection or running of the management company. The management company can sell out to another company if it chooses.
A French bank will investigate the quality and solvency of the management company before agreeing to offer a French leaseback mortgage.
Importantly, when evaluating the net income yield don’t forget to make an allowance for all the costs of purchase and ownership. The UK Financial Times estimates that the real yield may be reduced by at least 1% per year when these costs are included.
You will be liable for Taxe Fonciere after the first 2 years, whoever is using the property.
Owners will need a French accountant to deal with the VAT return.
You may be charged for the Frais des Copropriétés, the freeholders’ responsibility for the upkeep of the common parts.
We can arrange French leaseback mortgages with a bridging loan to cover the time you are waiting for the VAT rebate. Interest on a French leaseback mortgage will only be charged on the amount drawn down, which depends on the completion stage of the building works.
More on French Leaseback Mortgages
The interest rate charged on a French leaseback mortgage may be higher than on an ordinary property transaction because it is harder for the bank to sell a French leaseback property on the open market in the event of foreclosure on the French leaseback mortgage.
The choice of whether to renew the lease after 9 years is at the management company’s discretion. Not only do they have the right to renew even if you are not happy with their performance, they also have the right not to renew, which would leave you with no guaranteed rental income, just the outgoings such as your French leaseback mortgage.
The market for sales of French leaseback property during the period of the lease is not the same as the open market, because the buyer would have to take over the remainder of the lease. Some schemes limit the number of units which can be for sale at any one time. It can be very difficult for a subsequent buyer to arrange a French leaseback mortgage.
All units in the holiday resort will finish their rental contract at the same time, so there could be an over-supply of identical properties for sale. The number of buyers looking to buy within a resort may also be limited. Some banks refuse to offer a French leaseback mortgage if the property changes management company.
Finally, there is increasing concern that many French leaseback properties may have been mis-sold so you need to do some due dilligence regarding what you are being offered.
Glossary of Relevant Terms
Acte authentique de vente – The conveyance deed.
Benefice Industrial & Commercial (BIC) -The tax regime for leaseback income.
Contrat de Reservation – Reservation contract, also called contrat préliminaire or preliminary contract. The contract must indicate the size, number of rooms, price and delivery date. The seller undertakes to supply the property as described and the buyer gives a dépôt de garantie, generally 2-5%.
Dépôt de garantie – Reservation deposit.
INSEE Institut National de la Statistique et des Études Économiques – France’s National Institute for Statistics and Economic Studies.
Kit fiscal – A package of tax forms for a buyer to complete to reclaim the VAT on a leaseback purchase.
Loueur en Meublé Non Professionnel (LMNP) – Check the latest LMNP regulations for French leaseback mortgages under LMNP.
Loueur en Meublé Professionnel (LMP) – Check the latest LMP regulations for French leaseback mortgages at LMP.
Loi Demessine – Tax incentive for leaseback rental income in tourist areas.
Lot – Fractional part of a copropriété which is the basic unit for copropriété charges.
Règlement de Copropriété – the legally required agreement covering the management of a building in multiple occupancy.
SH Surface habitable – Living space excludes cellar, cupboards, balcony, staircase.
Vente en état future d’achèvement (VEFA) – Off-plan sale. Especially relevant, VEFA projects are eligible for French leaseback mortgages.
Zone de Revitalisation Rurale(ZRR ) – Rural development zone.