Since way before the UK Brexit referendum, clients have been asking us “What will happen to French mortgages if the UK leaves the EU”. For over 3 years there has been so little clarity on the subject of the Brexit Consequences for French Mortgages that the question was impossible to answer, though we attempted to give some insight in a previous post entitled Brexit Implications for French Property. Following the UK General Election of 12th December 2019 it’s now possible to provide a little more detail of the Brexit Consequences for French Mortgages though not nearly as much clarity as we would like or you would wish. However enough has changed to make it useful to post an update.
Conflict of Economic Ideologies
The first, and most obvious, point is that the eventual post Brexit arrangements between the EU and the UK will be dependent on how differing ideologies play out, thus the outcome will far more than just simple trading arrangements. In some respects there are parallels, admittedly imperfect, that can be drawn from the European history of the early 1800’s, notably the Continental System. This difference in ideology will complicate the reaching of an eventual agreement and the eventual outcome may need many years to fully instantiate because both sides will see the outcome as international power politics and realpolitik more than negotiating a rational trade agreement between economic actors.
To oversimplify, let’s consider the fundamentals of the two sides positions.
On the UK side, the position could be distilled down to the proposition that the UK is a relatively large, successful neoliberal economy which sees its future as lying in a network of international trading arrangements which give it the freedom to pursue an expanded neoliberal trade policy. The political shorthand for this has been the proposition “Global Britain” and the assertion that the UK will “Have its cake and eat it”.
On the EU side, the analysis appears to be different. From this position, the UK can be viewed as a mid sized, relatively unsuccessful economy (as measured in terms of productivity, growth and social cohesion) which is critically dependent on a single sector (financial services). Under this analysis the UK has voluntarily chosen to separate itself from the benefits of EU membership and launch itself back into an imagined glorious imperial past. The political shorthand for this is the proposition that the UK, as a mid sized economy will need to align with one of the main trading blocks, EU, US or China, and that the choice will determine its economic relationship to the EU thus “Not have its cake and eat it”.
However this plays out, the resolution will be neither quick nor simple and may take a decade or more to fully play out. For now, the Brexit Consequences for French Mortgages may be clearer but they are far from clearly delineated.
Direct Consequences
For the individual buyer of a French property the Brexit Consequences for French Mortgages can be relatively easily mapped using a simple decision tree or a series of binary questions.
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Which economic block (EU, US or China) will the UK choose to gravitate toward?
Broadly, the closer the alignment of the UK to the EU the less significant the Brexit Consequences for French Mortgages will be.
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Do you have entitlement to EU citizenship as a national of an EU member state or through dual nationality of an EU member state?
If you have entitlement to EU citizenship you will be exempt from EU visa requirements.
If you do not have entitlement to EU citizenship you will require a Schengen visa unless the EU negotiates visa free travel arrangements with the UK.
It is expected that the EU visas will be electronically enforced at the Schengen perimeter border.
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If you do not have entitlement to EU citizenship will my French property occupation be limited?
This will depend on whether you intend to use your French property for more or less than 180 days per year with no visit being longer than 90 days calculated on a rolling basis?
If below this threshold you will need a Schengen visa and the visa limitation will not, in practice, affect your use of the property.
If above this threshold you will need to hold a French Carte de Sejour.
The French Government have provided an online service for Carte de Sejour Applications.
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What is a French Carte de Sejour?
The French Carte de Sejour is a document issued by the French state that confers the right of residence in France upon the holder.
It is important to understand the various Carte de Sejour that the French government can issue because each comes with its own terms and conditions.
It is not yet clear what terms the French government will apply to UK citizens applying to remain in France for periods that exceed the Schengen visa but an indication can be forecast from French practice before the establishment of the EU and the way the regulations are presently applied to 3rd countries as the UK will become.
The four most likely important conditions that will apply are likely to be:
1) The holder will need to be fiscally domiciled in France.
2) The holder will need to prove that they have sufficient and stable financial resources to remain in France without becoming a burden on the French state.
3) The holder will need to prove that they have sufficient health insurance to cover all reasonable eventualities.
4) The holder will not be permitted to work or exercise self-employment in France without a separate work permit. Under the regime prior to the EU the test for this was severe in that to obtain a French work permit it was necessary to prove that the work could not be undertaken by an available French national.
It was not generally difficult to obtain a Carte de Sejour to live or retire to France provided one had sufficient independent means of support.
Indirect Consequences
It is too early to be able to list the indirect Brexit Consequences for French Mortgages but from our team’s experience of living and working in France since 1980 we think the following considerations may become significant.
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Interest rate risk.
The economic forecasts of the UK performance post Brexit suggest the UK economy will become relatively poorer compared to the EU economies and, with the additional UK low productivity problem, this suggests that French mortgage lending to UK borrowers will have higher financial risk.
Interest rates demanded of UK mortgage borrowers may thus carry a risk premium making the cost a French mortgage slightly higher than it would otherwise have been.
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LTV risk.
UK residents have been able to obtain French mortgages with the smallest personal contributions as applicable to residents of other EU member states. As a third country resident you may find the maximum loan to value falls to the level of other 3rd countries.
For the majority of 3rd countries the max LTV is 60% so you would have to contribute a property deposit 40%.
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Currency Risk.
GBP (Sterling) has already fallen to £1 = €1.1658 (as of today 23/12/2019) down from £1 = €1.6708 on 1st March 2000 and there is no obvious reason that GBP will halt its slide or regain its value against EUR in the short or medium term. The wholesale daily rate can be tracked on the ECB website. You can track our internal company forecasts on our Data Sciences site.
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Currency Volatility.
Though there has been a consistent falling trend of GBP against EUR there has been sufficient volatility in the FX cross rate to provide tactical opportunities to mitigate the falling trend to service French mortgage payments. Yow will find helpful information on how to manage your FX exposure on our pages French Foreign Exchange and French Foreign Exchange Planning.
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Regulatory Alignment Risk.
Should the UK decide to be cease alignment with the EU financial services regulatory regime, it is possible that EU based banks would effectively blacklist mortgage lending to UK domiciled borrowers. This is presently the case between the EU and the USA under the US FATCA (Foreign Account Tax Compliance Act) legislation which has led to US domiciled borrowers being excluded from EU financial services products.
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Financial Services Passporting.
It is presently acceptable to hold financial services products contracted with UK entities to cover you in France.
Because, in most scenarios, it is expected that financial services passporting within the EU will exclude the UK and UK dependencies (e.g. Jersey, Guernsey, IoM, Gibraltar etc.) you will need to check the forward validity of financial services products you use in France.
Specific areas of concern are:
1) Banking Services.
2) Insurance Services.
3) Health Cover.
4) QROPS and other Pension Provisions.
Overall Assessment Brexit Consequences for French Mortgages
Our overall assessment is that for most classes of French mortgage borrower the position will not change substantially, beyond the possibility that rates charged may be slightly higher and the LTV (Loan To Value) ratio might be slightly lower. Sufficiently qualified UK residents experienced little difficulty in obtaining French mortgages before the EU and we expect the post EU position to return to a very similar position.
However, there are some caveats:
- The position is still very uncertain so caution is advised and progress monitored as it evolves – we will regularly update this page as changes become apparent.
- Borrowers who intend to emigrate to France will need greater personal financial resources than during the period in which the UK was an EU member state.
- Anyone intending to work or operate a business in France will find the transition more difficult to surmount, particularly in the case of low skilled occupations for which there is already an oversupply of French citizens.
- It will become administratively more difficult, if not impossible, to live in France for extended periods whilst retaining UK tax domicile and using UK financial services products.