Equity release to renovate your French Home

A Cash Injection : the Reynolds used a French Equity Release mortgage to free up money which they had invested in renovation work.

It was almost three years ago that husband and wife Jim and Marilyn Reynolds purchased their partially renovated 250 year-old farmhouse. Two years into the purchase, they decided to re-finance the property to cash out some of the renovations expenses that they had invested.

The Reynolds describe themselves as serious Francophiles. Their interest in the culture, history and county began in the early 1980’s when they first began renting apartments in Paris. In 1987, the Reynolds travelled down to the South of France and discovered the Luberon area and immediately fell in love with the location. From 1991 on they began renting houses in area. Over that fourteen-year period they got to know the surrounding region, the towns and markets and made many close friends among the local community.

In 2005 they decided that they were ready to start looking for their own permanent property. The plan was to find a place that would serve for the moment as a vacation home but would be also be rented out. Eventually it might become a primary or more full time residence. When they found their current property they both agreed that, “It was a ruin, but we both saw the potential and decided to take the plunge!”
Soon after, they bought the property for 650,000 euros.

“Our house is everything we could have hoped for after all those years of dreaming and planning.”

The house was likely built in the early 1800’s and had been unoccupied since the 1940’s. It is situated on 1.75 hectares (5 acres) of open land that is south facing with incredible views of the hilltop village of Roussillon. It is located in the area east of Avignon and between the Vaucluse plateau and the Luberon Mountains. The house and land is at the south edge of a small hamlet and within 3-4 km of full service villages with all amenities.

The owner from whom the Reynolds purchased it had undertaken some initial renovations. They had essentially reconstructed the exterior and had renovated the interior into new rooms - but without electricity or plumbing. Now, after renovation, the house consists of 5 bedrooms, each with an in-suite bath, large gourmet kitchen, salle de sejour, large outside terrace with adjoining pool, and a covered terrace protected from wind and rain.

In September 2005, the Reynolds began renovating, picking up on the work of the previous owners. The renovations went on through to June 2007 and included substantial changes such as refitting the house for electricity, and overhauling the plumbing .and complete finishing of the interior and exterior. During this process, the Reynolds became increasingly frustrated with the original lender that they had been working with. There were late payments to contractors, poor accounting practices and a real difficulty in communications.

In 2007 they decided to re-finance the property to recover some of the equity they had contributed and to switch to a new financial organisation. At this point, the Reynolds began to work with France Home Finance, a leading independent mortgage broker in France specifically focused on serving expatriate and non-resident investors.

France Home Finance immediately understood exactly what we wanted to do and promptly presented us with several loan options. They helpfully explained the mechanics, risks and implications of each product.” adds Jim Reynolds.

After going through property purchase, renovation, and having had a series of undertakings with the French banking system, I would strongly recommend that anyone considering a property purchases not attempt to navigate this system without reputable professional help” says Marilyn Reynolds. "But the end results have made it all worthwhile. Our house is everything we could have hoped for over all those years of visiting, dreaming and planning.”

To see the Reynolds home, visit www.provencedreamhouse.com

Equity Release – the facts
In France, equity release on property is becoming an increasingly popular financial option for owners such as the Reynolds who are seeking to leverage the capital and growth in value accrued on their homes or vacation properties. Consumers of equity release products use this additional money for a range of projects that include financing renovations, acquiring additional properties or alternative investments. The term “equity release” describes the process of freeing available capital from currently owned real estate property. Other terms for this type of loan include cash-out refinance, second mortgage, home equity loan or home equity line of credit.

There is some labeling confusion from country to country. In the UK, equity release is a product also known as a reverse mortgage. The client offers the title of their property to the bank in exchange for a lump sum payment and/or a regular stream of payments from the bank. The owner retains use of the property until death at which time the property is sold and the bank reimbursed. This is a popular method to supplement retirement income. Most French banks do not offer this product to date although there is a consumer movement to demand it.

In France, equity release or cash-out refinancing is referring to a mortgage where the bank gives you cash and you pay it back in monthly installments. If the property currently has a loan outstanding, that loan must be refinanced at the same time. The sum of the loan plus cash out must not exceed 70%. This is because the bank will not accept to be second in line behind another lender or claimant in case the borrower stops paying the loan and the property must be seized and sold.

Lending guidelines
Other general lending guidelines around French equity release include a €100,000 minimum borrowing and proof of ability to pay monthly loan installments. Ability to repay is defined as total monthly debt payments that do not exceed more than one third of regular monthly income. Unfortunately French banks will not grant an equity release to consolidate other debts to arrive at this 1/3 debt to revenue ratio after consolidation.
They can also be less willing to grant equity release to self employed individuals. The concern being that funds released could be injected into the business to bail it out of trouble or to finance growth – both extremely risky in the eyes of the French banks.

Relative to personal loans, equity release products tend to offer much lower interest rates and when taken over a 20 or 30 year period rather than 7 to 12 years, they offer much lower monthly payments.

In the French market, there are a variety of equity release products available including both interest only and repayment mortgages. Variable interest rates track the Euribor index (European interbank lending rate based on European Central Bank rates) plus a % bank margin. It is also possible to fix the interest rate for a number of years or even for the full duration.

Choosing the product that is best for you is depends on both your individual financial circumstances as well as the goals for the intended capital. It’s important to remember that with an equity release, the bank will need to place an official claim or “first charge” on the property for the funds released. This lien is known as a “hypothèque” and the process can only be done through a French notaire. If a borrower does not want to travel in person to France to sign this legal act, it can be done from a distance by a power of attorney with the signature witnessed by a local notary or French consulate.

As well, the fees to register this charge and taxes are generally 1.5% of the amount borrowed and there can be a bank filing fee or broker fee. These costs are often deducted from the amount of cash released so the client has no out of pocket expense for the operation.

January 2009

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