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UK and US buyers, don't miss out on your dream because of the exchange rate: If you are a cash buyer you can potentially hedge against the exchange rate by getting a French mortgage and paying out the balance when the rate improves - on recent predictions this could save you as much as 8 percent. Look at how this can be achieved in detail by clicking here

Don’t loose sight of your dream property purchase because of exchange rates and market confidence.

We speak to Peter Brooke a financial Consultant with the Spectrum IFA group. He explains how to buy your property and not be stung by exchange rates and the credit crisis.

It may appear nothing short of madness at the moment to be investing in foreign property. Interest rates are up, and sterling is weak compared to the euro. All these things put together are having an impact on the confidence of many buyers.

But the reality now is that there may be no better time to buy in the South of France, and many investors are missing out on some great deals because they don’t fully understand the investment and finance options available to them.

A recent study by FNAIM, France’s governing body of real estate agents, states that the Languedoc is the most undervalued region of France and demand for our properties on this very website would seem to confirm that this really is the current property hotspot in France. According to the Spectrum IFA Group, a European wide financial services company, with superb connections to the UK, the great weather and ‘undervalued’ property, if you use the financial system wisely you can still plan to buy your dream home in what has fast become a buyers market.

We sat down for a chat with Peter Brooke, a professional financial adviser and partner at The Spectrum IFA Group, and discussed the current climate with him:

“Peter, only a year ago we had many clients who were keen to buy a second, or even third property abroad, many have stopped looking blaming the current exchange rates and uncertainties, what are your thoughts on this?”

“As you well know, people buy properties for two main reasons life style or investment. If the basic fundamentals of the property remain the same, i.e. you still want this lifestyle or believe that the value of the property is going to continue rising over your chosen timescale, or a bit of both, then changes in the economic cycle shouldn’t make a huge difference to you. Remember that all markets are cyclical, bubbles are inherent and it is incredibly difficult to correctly time your entry into or exit from them. A commitment by the investor to the ‘fundamentals’ are the key to good investment decisions.

Of course, at the moment there is a lot of focus on the credit and currency markets and maybe short term investors will need to extend their horizon a little, but no one should buy property on a short term basis anyway.

“But our clients are keen not to miss out on their dream property but are worried about this; is there anything that they can do?”

“There are things you can do to mitigate the major effects of these cycles and still be able to buy your property… lets look at the different types of clients you have?

“Ok, I had a call from a client the other day who had £345 000 in his bank but was reluctant to buy right now due to the exchange rate, what could he do?”

“This is a common concern, he has enough money in a deposit account to pay for the entire property – he’s found the ideal property, why does he not consider taking a mortgage in France to pay for the property now and then repay it in full when the exchange rate is more to his liking? … penalty free of course!

If he feels that the long term Euro/Sterling exchange rate is likely to be in the area of say, 1.35- 1.40 (which according to our research is probably realistic) then he could leave the cash on deposit in sterling until we return to this level and borrow in France. A quick web search shows deposit rates on sterling of 6.55% which should more or less offset the cost of the loan.

So for your client with £345 000 this would correspond to a purchase price of €400 000 today plus fees of approximately €32 000; if sterling was to move to 1.35 then you would only need to send £320 000 to pay for the same property, a saving of 8%.

Of course you have to pay interest on the money in France, an 80% interest only loan (€320 000) would cost €1600per month at approx 6% interest and a 25 year repayment loan might cost as little as €1860pm (4.95% fixed rate).

You can also book a forward exchange rate on the monthly repayment so that you know exactly what rate you will be getting if you have to send money every month.

Remember you are sending €1600per month (£1300) instead of £345 000 in one go!!

Of course if you are considering renting out the property – even on an ad-hoc basis - the revenue can help support your French loan further reducing the amount of money that you have to transfer to France.

In addition a mortgage in France can be very tax efficient in terms of income tax and alleviating wealth tax issues, even for non residents.”

The following table summarises all of the above:

Purchase price        €400 000
Notary cost (8%)     €32 000
20% deposit            €80 000     total cash needed     = €112 000 (£90 000)

French loan           €320 000 @ 6% interest only         = €1600pm (£1200pm)

Remaining Capital    £255 000 (£345 - £90) @ 6.5% AER    = £1390pm

If sterling recovers to 1.35 then pay off the loan of €320 000 with £237 000 leaving £18 000 in the bank.

“That’s great, but if a client hasn’t got the cash but has equity in their property in the UK couldn’t they just take the cash out of it to buy?”

“With the surge in property prices in the UK over the last 15 years, easy access to credit and the long period of relatively low interest rates many people have done this, taking equity from their houses in the UK and paying for property abroad.

Firstly, I understand that this is now significantly harder to do due to lending criteria becoming stricter in the UK. Many banks are withdrawing their mortgage products now but the sub prime crisis has not hit France in the same way, mainly due to the Banque de France’ strict controls on lending institutions. We can still readily achieve loans for non residents of up to 85% of the property price.

Secondly, this could be an even worse move now with the exchange rate situation as it is. For this example lets ignore the interest rate on the loan as the mortgage rate in France is similar to that of the UK, though still slightly lower.

Same property but this time the buyer gets a UK loan to repay it:

Purchase price        €400 000
Notary cost (8%)   €32 000

Total project         €432 000 = £345 000 (today)

UK loan         £345 000 @ 6% interest only     = £1725pm

Sterling recovers to 1.35

Assuming no growth or loss in property value since purchase it is now worth £320 000 and you have a loan of £345 000 – you are in negative equity due solely to the exchange rate and no change in any of the fundamentals of the property. For this reason I would feel it much more prudent to take a maximum loan in euros and raise the deposit and fees in the UK.

In all cases overstretching oneself to buy any property is never a good idea. And I feel that it is always more sensible to have the debt on an asset in the same currency as the asset”

“We had many clients do this in the last few years, should they now be worried about this situation?”

“I doubt it very much as many of your buyers have had good growth on their French properties so there should be a good level of equity no matter what the exchange rate does. Some may consider, however, actually doing an equity release on their property in France to repay the loan in the UK, this would take advantage of the strong euro at the moment and some French banks have products specifically for this. There are of course costs to this so it would be worth taking advice before opting for this.”

For more information about obtaining a French mortgage please see our mortgage information page, or feel free to contact Peter to discuss the pros and cons of any of the issues raised.

For details on how to reduce the costs of foreign exchange and how to lock in a long term rate please see our foreign exchange pages.