How are mortgages different from the US in France and the United Kingdom?
USA vs UK and France
Business is done differently in different parts of the world, buying a home with a mortgage is no exception.
In the USA, if you want to buy a house, you have several financing options. In the era of lower interest rates, many people (myself included) locked in 30-year fixed-rate mortgages at or below 3%. This would not happen in other countries. Here is how people in the United Kingdom and France finance home purchases.
United Kingdom
The interest rate resets every five years or less. This is despite the overall mortgage term being longer (25 or 30 years).
In the past, UK mortgages were variable rate, although in recent years, many UK mortgages have been fixed rate.
Credit scores similar to those in the United States are used.
There are a variety of mortgage types including capped-rate, variable, and fixed-rate mortgages. If you choose a fixed-rate mortgage, you will be issued a mortgage with an “introductory rate” and it will not change for a certain period of time. If you switch mortgage products before the end of the introductory rate period, you will likely encounter exit fees. These exit fees can be very costly, but with a fixed-rate mortgage, you are also protected from the rise in interest rate from the Bank of England. Usually, after the introductory period, a borrower will get a new mortgage with a new introductory period or be switched to the standard vehicle rate (SVR). Source: What are the types of mortgage in the UK?
While some lenders will lend 100% LTV (Loan-to-Value), meaning no down payment or equity in the property; buyers who have 60% or more equity in the property will get the best interest rates. Typically lenders like to have not more than a 60% to 65% LTV on a property. Most lenders have a maximum of 95% LTV on any deal, but the interest rates will be higher than the 60% LTV deals on a similar property. Any deal with above 80% LTV will be considered “high”. If you need to lower your LTV, mortgage lenders usually allow borrowers to pay down 10% of the balance per year without penalty. “Buy-to-Let” loans tend to have a maximum LTV of 75% to 80%. Source: Forbes- Mortgage Loan To Value Ratios (LTVs) Explained.
In the UK, “Buy-To-Let” mortgages are what we in the USA would think of as investment property mortgages. It’s a mortgage secured by a property as collateral but is specifically for investment properties where you will rent out the space to tenants. They will usually have a higher interest rate and the landlord or investor’s credit will be checked. Furthermore, the loans are typically issued on an “interest-only” basis. This is where you are only required to pay the interest each month. The lender will want proof of rental income and will want to “stress test” to make sure you can make the payments, even if you have some vacancy. lastly, the lender will want to make sure you are not too old when the mortgage is supposed to be paid off. For most lenders, this “maximum age” is somewhere around 70 years old. This means if you are older (say in your 60s) then you might be offered a shorter mortgage loan term than someone younger. Source: Forbes- How does a buy-to-let mortgage work?
Sources: Investor’s Chronicle, Mortgage Introducer: What are the types of mortgage in the UK?, Forbes- Mortgage Loan To Value Ratios (LTVs) Explained, Forbes- How does a buy-to-let mortgage work?
France
Long-term fixed-rate loans. Very similar to the United States.
Can typically borrow up to 80% of the property value….with some exceptions. You will have a different LTV based on where you are from. For example, if you are a British national or French citizen, you might be eligible for a maximum LTV of 85%. However, if you are a US citizen, your maximum LTV 50%. The same 50% LTV limitation applies to Australian citizens and non-EU Nationals.
Only French banks can create a mortgage secured against a property.
French lenders don’t conduct the same type of credit checks we are used to in the United States. Instead, they will want lots of documentation regarding your income, and assets, to determine if you are a good credit risk and have to pay.
Age is a factor. If you are an older borrower, you might not be able to get a 30-year mortgage. Typically, borrowers age 75 or older can borrow for a normal duration. That age drops to 55 for Americans and non-EU/UK borrowers.
There are several repayment options, similar to the US. These include interest-only, variable-rate, and regular “repayment mortgages”. Repayment mortgages are exactly what we think of here in the United States when we get a fixed rate, fixed term loan…we pay the same amount each payment, where some of the payment goes to principal and some goes to interest. Variable-rate mortgages work a little differently. If your variable rate increases, instead of your monthly payment going up, you keep the same payment amount but pay for a longer period of time.
Mortgage lenders may force the borrower to have life insurance.
