A cash Injection

The Reynolds used equity release to free up money which they had invested in renovation work, explains Tahminae Madani.

It's been a long time coming, but French banks are finally offering equity release to property owners in France, whether resident or non-resident. It is becoming an increasingly popular financial option for homeowners such as the Reynolds, who are seeking to leverage the capital and growth in value accrued on their homes or holiday properties. Consumers of equity release products use this additional money for a range of projects, such as financing renovations, acquiring additional properties or alternative investments.

Almost three years ago Jim and Marilyn Reynolds purchased their partially renovated 250-year-old farmhouse. Two years into the purchase, they decided to refinance the property to refund 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 1980s when they first began renting apartments in Paris. In 1987, they travelled down to the south of France, discovering the Luberon area and immediately fell in love with it. From 1991 on, they began renting houses in the area. Over that 14-year period, they got to know the surrounding region, the towns and markets, and made many friends among the local community.

In 2005, they decided 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 holiday home but could be also be rented out. Eventually, it might become a primary or more full-time residence.
When they found their current property, they both agree that: "It was a ruin, but we saw the potential and decided to take the plunge!" Soon after, they bought the property for €650,000.

The house is thought to have been built in the early 1800s and had been unoccupied since the 1940s. It is situated on 1.75 hectares of souht-facing open land 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 on the edge of a small hamlet and within three or four kilometres of villages with all amenities.

The previous owner had undertaken some initial renovations, reconstructing the exterior and renovating the interior into new rooms, but hadn't installed new electrical or plumbing systems. Now, after renovation, the house consists of five bedrooms, each with an en-suite bathroom, large kitchen, salle de sejour, outside terrace with adjoining pool, and a covered terrace protected from wind and rain.

In September 2005, the Reynolds began renovating, picking up where the previous owners had left off. The work continued until June 2007 and included substantial changes such as rewiring and plumbing the house and finishing off the interior and exterior.
During this process, they became increasingly frustrated with the original lender 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 refinance the property to recover some of the equity they had contributed to the renovations, and to switch to a new financial organisation. "France Home Finance presented us with several loan options, explaining the mechanics, risks and implications of each product," explains Jim.
"Because this was a renovation of an ancient ruin, our costs exceeded our estimate. Therefore, we undertook an equity release to defray some of these additional expenses," adds Marilyn. "After surviving a property purchase, renovation and undertakings with the French banking system, I'd recommend that anyone considering a property purchase does not attempt to navigate this system without reputable professional help. The end results have made it all worthwhile though - our house is everything we hoped for over all those years of visiting, dreaming and planning."

Equity release - the facts

The term equity release describes the process of freeing available capital from currently owned 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. The 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 refers to a mortgage where the bank gives you cash and you pay it back in monthly installments. Currently, French banks allow for up to 70% of the value of the property to be released for use in other projects. If the property currently has an outstanding loan, 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 being second in line behind another lender or claimant, in case the borrower dafaults on paying the loan and the property has to be seized and sold.

Lending guidelines
Other general lending guidelines around French equity release include €70,000 to €100,000 minimum borrowing, a 30-year maximum loan term 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 one-third 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 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, taken over 20 years rather than seven to 12 years, 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 percentage bank margin. It is also possible to fix the interest rate for a number of years or even the full duration.

Choosing the product that is best for you 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 is known as a hypotheque and the process can only be done through a French notaire. If a borrower doesn't 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 notaire or French consulate.

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.

Tahminae Madani is the managing director of France Home Finance

www.francehomefinance.com