'Free holiday homes' in France

Second home-seekers who desire an overseas property in France can effectively get a holiday home for free following the introduction of a new type of mortgage.

The emergence of interest-only leaseback mortgages is expected to help the French property market compete with Bulgaria and Turkey where overseas property investors have been turning of late.

It means the borrower of an interest-only leaseback mortgage can purchase a leaseback property in France, cover the cost of their mortgage and still use the property for a few weeks a year themselves as a holiday home, according to property investment firm Assetz.

The French leaseback scheme was introduced by the French government 20 years ago to increase tourism in areas such as the Cote D'Azur, the Alps and Paris by increasing the amount of quality holiday accommodation.

Under the scheme, investors purchase a freehold property and lease it back to a pre-selected property management company earning guaranteed rental income for at least nine years.

Investors are typically allowed to use their property for a set number of weeks each year for a holiday – although that depends on the development.

They also benefit from a 16.4 per cent discount on the property price with the French government providing a VAT cash back upon completion.

Until recently mortgage lenders in France would only offer interest-only mortgages on non-leaseback properties but this has now changed.

Investors can now purchase a property with a projected rental yield of five per cent on an interest-only mortgage of about three per cent of the property price. After mortgage costs, an investor would therefore receive two per cent of the property price per annum.

Stuart Law, managing director of Assetz said "even if they [investors] use the property for a few weeks a year and get a low four per cent yield as the rent guarantee for the rest of the year, the mortgage cost is still the same or less than the rental income, making it effectively a free holiday home."

Interest-only mortgages operate differently in France from the way they do in the UK. There are two phases to the mortgage, where the first phase is interest-only and the second phase, after ten years, sees the mortgage become a capital repayment mortgage.

To obtain an interest-only mortgage in France, investors also need to pay a deposit equivalent to 20 per cent of the net property price, plus VAT.

If the investor receives two per cent return per annum on the property price, they are effectively receiving ten per cent a year on their deposit as well as the capital gain.

After ten years when the period of guaranteed leaseback and interest-only phase of the mortgage has ended, investors can sell the property to get their original investment back and cash in the capital gain.

For investors considering buying overseas property in France, Assetz says growth levels were 10.9 per cent for the 12 months to the end of November 2005 and it expects growth to level out at ten per cent in 2006.

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