Pound to reach €1.25 in 2012?

Investors are tiring of the endless succession of agreements to resolve the Euroland sovereign debt crisis. Plans A through D have come and gone, either applied only selectively or trashed in toto. November's Plan D, for example, had investors "voluntarily" writing off 50% of their loans to Greece. A couple of days before Christmas the International Monetary Fund moved the goalposts. It called on bondholders to dig deeper and accept what would amount to a 65% loss. Investors had not been overjoyed about losing half their money; they were even less enthusiastic at the prospect of losing two thirds. Plan E, the latest, is a long-term project that will compel member states to observe the rules of the 20-year old Maastricht Treaty and the Stability and Growth Pact of 1997. In essence, countries that fail to keep their budget deficit below 3% of gross domestic product will be punished. How, and by whom, has yet to be decided.

There was one measure that might have turned the tables. The European Central Bank said it would make unlimited three-year loans available, at 1% interest, to every Euroland commercial bank. The first round of this Longer Term Refinancing Operation took place on 21 December. Analysts had calculated that demand could amount to €300bn. In the event, more than 500 banks lined up to borrow an average of nearly €1bn apiece. Any excitement that somebody was doing something was eclipsed by concern that so many banks needed so much money. The exercise did nothing to lower the Italian government's borrowing costs, which remain five percentage points higher than Germany's.

Neither Britain nor the United States face any comparable problem. Both are proprietors of their own currency, a position that gives them the power to adjust interest rates to suit their individual circumstances and to print as much money as they see fit. The latter ability means they need never default. For now, that gives them an advantage against the euro and both have strengthened against the single European currency by about four cents in the last month. There is every chance they will have picked up another four by the end of January.

This even should trigger an increase in interest in properties in France, check out our French mortgage best buys.

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The effect of the UK budget on the French property and mortgage market

George Osborne’s budget today outlined some major changes to UK taxation but what effect if any will this have on the market for French property from UK buyers? The headline changes from the speech are the rises in VAT to 20% and the increase in capital gains tax to 28%. At first glance both of this rises appear to reduce the attractiveness of making investments as cash flow is effected by the rise in VAT and the long term profit of owning a second property in France is reduced by the increase in CGT.

Listening to Harriet Harman’s appraisal of the budget as being unfair on those with the lowest incomes, as proportionally speaking the increase in VAT will hit there hardest, we can glean that it some way this budget is beneficial to those on higher incomes. In many ways this is right, the effect of the intended reduction of the deficit over the term of this parliament will be of benefit to those on higher incomes, as in fact it will eventually be for everyone. With regard to the French property market, usually the preserve of those on higher incomes who are least affected proportionally by the increase to VAT, the effect of a Britain living within its means will be a stronger pound, and therefore lower costs for mortgage payments, whether the payments are regular or lump sum.

The rise in CGT may deter some UK based buyers to the French property market, these same buyers being deterred in fact from almost any form of investment, if they are overly price sensitive. Just a few years ago the rate for CGT stood at 40% (with some additional taper relief benefits) so in fact the rise could have been larger but seems to have been optimised in terms of ensuring the balance of payments to the treasury increases. As the majority of investors in France look for the long term, I do not believe the rise in CGT will have much of a noticeable effect. In fact I believe that the certainty brought about by the budget will in fact allow more people to make decisions which had been delayed pending the budget.

Overall the picture looks good for the UK and the outlook for continued excellent conditions for buying French property with mortgages in France.

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EU inflation and French mortgages

With the news today that inflation has return to the Eurozone, what does this mean for the outlook for interest rates for French mortgages? The increase in consumer prices for the month of November marks the end of a five month cycle of deflation across the European economic area. The 0.6% rise was driven largely by rises in energy prices which are common at this time of year but exacerbated by the returning trend for oil speculation with traders finding it cheaper to store the oil and to take orders for delivery in six months time. This practice serves to drive up the prices but reducing the supply in the face of increasing demand as oil consuming companies look to hedge against rising costs.

This increase in inflation will increase pressure of the ECB to raise the rates for French mortgages but the pressure to not halt the shoots of growth in the economy with jobless figures still rising will mean that in the short term interest rate rises are still quite unlikely. In the longer term inflation and growth will take a firmer hold, bringing increases in French property prices as investors continue to move out of cash and into assets such as gold and property to avoid the erosion of their net position due to rising inflation. However, with the return of confidence to the market we are predicting in early 2010 and the activity in the market for ski properties we may actually see French lenders starting to decrease their margins slightly and thus their rates for French mortgages will fall in the short term, in order to remain competitive.

If you are looking to purchase in France in the coming months then it would be a good idea to speak to your broker for an up to date view on the timings of any of the rate decreases and when the each individual French bank publishes their rates in order to get the best deal. Alternatively, you can view our current best buys for mortgages in France.

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Mortgages in France see competiton and innovation

Mortgages in France have not historically been a hot bed of innovation and competition but signs are that the French mortgage market is beginning to catch up with its cousins abroad. Recent reports from French specialists Empruntis reveal that September showed a reduction in the average rates of 0.20% for fixed rates for most durations and a reduction of 0.15% in the rates for variable mortgages indicating strong competition from French banks and French home loan specialists.

For mortgages in France for non-residents, we are seeing innovation with a next generation Hybrid mortgage product with rates typically under 3%. This Hybrid mortgage allows you to split your loan into two parts, one on an interest only basis and one on a capital and interest basis. There is a minimum loan amount of €300,000 and at least €100,000 must be on interest only. A further criteria for the loan is that the borrower must be able to show 150% of the loan amount in net assets made up from net equity, savings, stocks or shares.

The outlook for the French property market as a whole seems positive with the FNAIM, national association of estate agents reporting that the market is stable. In September, prices rose 0.1% and though prices are down over the last quarter, the overall picture is good with a rise of 2.8%. This upsurge in prices is in part responsible for the competition and innovation amongst the banks who are seeking to increase their share of the mortgage market in France. Other aspects that make up the picture are the rises on the stock exchanges, the price of gold and the slowing rise in the growth of unemployment. As has been written elsewhere, these conditions point to an excellent period for buying French property; low interest rates and still uncertainty in the property market mean there are bargains available. Access to finance is good for those that can afford it at up to 100% loan to value meaning there is not even any need to worry about the strength of the Euro. This period looks set to last for a while as Jean Claude Trichet has deemed the current rates of interest appropriate signalling that the current rates should last into 2010. While this period won't last for ever, it seems to be with us for the next 6 months at least before we may see the return of inflation and higher interest rates.

Remember that all mortgages in France require supporting documentation and are subject to an affordability calculation based on tax returns or audited accounts. For a guide to getting mortgages in France there is a handy article I wrote yesterday here. Guide to mortgages in France.

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