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Equity release catches on

Connexion edition: September 2007

Recent changes in French banks' lending policies along with a move away from long-term rental towards home ownership has boosted property prices in France. This, together with a supportive government policy and low interest rates, has made the purchase of French property attractive to UK buyers.

One current area of high activity is equity release from French property, a product on offer from at least two French banks. This type of borrowing is available to both French and non-French nationals.

General lending guidelines include:
- Maximum loan of 75% of total property value, less any outstanding mortgage
- €70,000 minimum borrowing
- 20 year maximum loan term
- Proof of ability to pay

French banks are reluctant to grant equity release if this involves the repayment of existing, more expensive debt (such as that on credit cards) and can be particularly cautious when loan eligibility criteria depends on any element of promised debt reduction. This accords with the government's desire that monies acquired through equity release should, at least in part, stimulate the economy.

The application process is very similar to that for a standard mortgage and interest rates are also around the same levels. However arrangement fees are usually higher at around 2% of the capital released. Mortgage broker Footholds in France has noted a rise in the number of enquiries for equity release from UK expats in France. Director Mike McBurney says this reflects the UK propensity for employing capital gains on property to fund lifestyles, create more wealth, or move up the property ladder.

Mr McBurney believes that equity release has an important role to play in the expat market but advises that the purpose for which it is to be used is critical. He said: "I don't believe the UK property boom will be replicated in France where generally there is no shortage of land, no shortage of housing and no large immigrant labour population providing sustained demand for low end property."

Some property companies are promoting equity release as a means of generating cash which can be used to acquire additional property. Mr McBurney added: "These schemes may require borrowers to take a high-loan-to-value mortgage. It is difficult seeing the current government allowing the run-away house price inflation that is a key factor in the UK buy-to-let market. Given that the high level of agent and legal fees in France could result in little or no capital appreciation in the early years, it could all go terribly wrong for a UK style buy-to-let investor."

Borrowing to undertake home improvements, renovations, extensions, barn conversions etc is considered an effective use of funds as it can reasonably be expected to lead to an increase in the value of the property. Releasing equity to improve lifestyle when in an asset rich but cash poor position is also likely to appeal to UK expat owners of French property. However, schemes offering cheap borrowings with the promise of depositing these at a rate of interest higher than the borrowing rate should be reviewed carefully as such products can have high front end costs and may carry interest rate risk.

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