Cash in the attic
Par Bérangère Hassenforder, Anthony & Co UK Ltd et Dr. Michael Annett, Anthony & Co International
French Property News, April 2012
One of the many consequences of the current financial crisis is the difficulty for individuals and companies to raise finance. Indeed, since 2008, banks have been tightening their lending criteria in many jurisdictions, including France, as a result of which finding appropriate finance has become harder.
The level of business turnover is under pressure, margins are lower, and there is greater competition from abroad, all of which factors squeeze a business profit down, with the consequence that business-owners find it more difficult to guarantee their levels of income.
For those looking to sell their businesses, they are hampered by fewer buyers. And in general, all incomes are under pressure, and yet the need for liquidity is ever greater. However, all is not lost. There are solutions! National statistics show that property prices in many regions of France have continued to rise, meaning that the longer someone has held their property, the greater inherent profit there will be in the property.
Even if there was an original loan on the property, the amount of free capital will increase, and it is this free capital that could be released and made available – and all whilst still owning the property. In other words, you could make available some of the liquidity locked away in the value of your bricks and mortar.
Whilst banks will always look at the income of a borrower to ensure that they can meet their loan repayments, they will also ensure that their loan is ‘secure’, and so will look to what other free assets the client may have.
The reason for this alternative security is quite simple – should the bank have to request the loan’s early repayment, the funds can come from the client’s other assets, so avoiding the bank having to repossess the property and make the borrower and his family homeless – not the most ideal publicity for the lender !
Whilst evidently ordinary loans exist, there is also the variant loan called an ‘equity-release’ which can often be a good alternative since it provides the bank with the level of security it needs on an existing property, and so removes the need to consider other assets as the security. However, many people shun the idea of debt, particularly our elders who grew up with the notion that one only buys something when you have the money available. But debt is frequently a useful tool when planning tax optimisation – and especially given with the various options available today – though, admittedly, the degree of success can depend on the country of tax residency and in which country the assets are located.
Lucky wealthier clients could benefit from a sufficient release of funds from their existing home to be able secure the wherewithal for a second home or a rental investment. Or, for properties with a market value of less than about €1m, both interest-only and repayment mortgages with today’s low fixed rates may prove to be most appropriate.
The French also have interest-only mortgages that can be secured on an investment of only a fraction of the loan amount. For larger properties valued at several million euros, a bank can more easily offer these ‘equity release’ schemes mentioned above, since their margins on the operation make it worth their while.
Evidently, a valuation of the property will be required in these cases, and the bank will also need to know the borrower’s financial circumstances so as to be able to establish their ability to pay the loan interest. In these cases, the amount lent by a bank (as a percentage of the security offered) can be much higher than in normal loans, sometimes even reaching 100% of the funds used as security.
However, the amount lent by the bank will always depend on the nature of the security: a cash security can enable loans of 100% of the cash value, whereas only around 70% of government and corporate bonds can be lent, and about 60% of equities. But, whatever the nature of the security, the point is that this same security can be made to work for you again … it can be used more than once, all to your greater advantage.
There is one issue on French mortgages to add, and this is that it is generally the case that the monthly mortgage repayment remains fixed during the term of the loan. This is quite obviously useful when interest rates rise, but when interest rates drop then the clients invariably want to reduce their repayments. But! In the event of mortgage interest rates increasing, and if the monthly repayments remains the same, it is the term of the loan that is extended to compensate.
Conversely, if the mortgage interest rate drops, then the term of the mortgage reduces – and this reduction in the term of the loan can be quite significant since the extra monthly repayment goes to reduce the outstanding capital of the loan, and thus the interest due, for the entire remaining term of the loan. Clearly, therefore, the earlier on in the mortgage term that this occurs, the greater the eventual benefits.
However, rest assured, for those who might be desperate to reduce their monthly repayments, most lenders will allow the monthly repayments to be reduced by some 20% of the very first repayment amount. Accordingly, loans of any type are not around to only be used as mortgages to buy property, they can also go a long way to reduce taxation and, as well, contribute to the increase in your overall wealth.
This is only an overview of the situation; it should not in any way be taken as advice, only an analysis of one’s personal circumstances will ensure a proper financial planning.
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