Banks see interest -only as high risk

Jo Cowling, of mortgage brokers International Private Finance (www. internationalprivatefinance.com) answers your mortgage questions

I am looking to take out a French mortgage and would like to consider an interest-only option. I understand that the criteria is slightly different to repayment mortgages. Are you able to explain how this works? E. De Vroome, London

Interest-only mortgages are far less common in France than they are in the UK. The primary reason for this is that they are not widely available on the French domestic market.Therefore, French banks see them as being higher risk when compared to repayment mortgages.

There are two primary interest- only options that you may want to consider. The first are products where the mortgage is interest-only for a short term, before reverting to the more typical capital and repayment mortgage.

Lenders will normally allow an interest-only period of between two and five years, depending on the total term of the mortgage.

For these types of products the lenders will calculate affordability based on the individual’s ability to cover the monthly payments during the repayment period of the mortgage.

As with all French mortgages, affordability is calculated using debt to income ratios. Lenders will allow between 30-40 per cent of an individual’s income to be taken with repaying existing debt commitments and your new French mortgage.

The second option is a full term, interest-only mortgage.

For this, affordability is calculated in the same way on the interest-only repayments. However the lenders will want to see that the individual has the ability to repay the capital sum at the end of the mortgage term (if you are only paying the interest off each month, you will be left with the original loan amount to pay back at the end of the mortgage term).

Usually the lender will want to see that you have net assets (property, savings, investments, pension funds etc) equal to 120-150% of the loan amount to facilitate the repayment of this capital sum.