Foreign mortgage on Irish property

Bubblin in Dublin

Hi all,

My GF is currently approved by her French bank to buy a property in Ireland. We are currently living together and she has been in Ireland for the last 5 years.

Just wondering if anybody out there has used a foreign mortgage to buy property in Ireland and what are the pitfalls if any?

Thanks for taking the time to read this post, looking forward to your replies.

gaius c

I'm a bit surprised to hear that a French bank is looking for a piece of our optional payment/no repossession of security mortgage market.

Bubblin in Dublin

Yes she is lucky indeed gaius c , her parents are going guarantor on it which helps.

Peregrinus

The pitfalls are likely to be higher costs, the involvement of both French and Irish advisers for the lender (with you paying for both, natch), longer turnaround times and possibly a generally more cautious attitude by the lender.

Bubblin in Dublin

Thanks Peregrinus, yes that is what we are thinking also. Although some banks are reducing their variable rates they are still well above the ones being offered by French banks, however if the cost having French and Irish advisors are too expensive it might not be our while?

Peregrinus

Your problem is that you have to weigh the cost of paying higher fees against the benefit of lower interest rates. But of course the initial cost is paid up front, whereas the benefit of lower interest rates accrues over time - and only accrues if the interest rate differential between Ireland and France persists.

Long term, I see no reason why it should. In principle, there's no reason to think that French mortgage rates will be lower than Irish (or vice versa) given that both countries use the same currency and the currency is freely transferable, and banks in both countries obtain their funds in the same capital markets. So it would be foolish to do your calculations on the assumption that you will enjoy a permanent interest rate advantage. You should work out how long the interest rate advantage must persist for you to recover your higher initial costs, and then ask yourself if it is reasonable to think that it will persist that long.

The_Conductor

Seriously suggest you look into the tax implications.
French citizens have additional obligations on foreign properties - both an annual wealth tax, a property tax and also reporting obligations- that would not necessarily apply to other parties. Using a French financial institution for mortgage purposes *may* trigger these obligations. Get professional advice.

murphaph

Peregrinus wrote: »

In principle, there's no reason to think that French mortgage rates will be lower than Irish (or vice versa) given that both countries use the same currency and the currency is freely transferable, and banks in both countries obtain their funds in the same capital markets.

I'd have to thoroughly disagree with that. The currency a bank lends a mortgage in is of little interest in calculating the risk to the bank, which is all the mortgage interest rate is really a function of. The legislative framework in place in the country where the property is located is of much more interest when calculating the risk to the bank (and so the interest it must charge to make a profit overall), as is the general economic climate in said country.

If French mortgages are anything like German ones, then there are solid reasons why the rates are significantly lower than Irish rates (we're borrowing 300k this year for a house build in Germany, fixed for 17.5 years at 1.4%). In Germany, you are in default after 2 missed payments and face a swift eviction process and zero public sympathy. The bank just has to ensure that the price paid is realistic for the property, so if the borrower defaults, the bank will recover enough from the sale to not be out of pocket after expenses.

In Ireland paying your mortgage appears to be largely optional. This places a huge risk on the banks, so rates must be higher to factor this risk in. The Irish economy as a whole is also smaller and arguably more volatile than the French economy (not that I think the French economy is healthier, but it is much bigger and perhaps better able to absorb shocks without crashing).

I suspect the French bank in this case is not actually lending on the Irish asset at all, rather than the GF's parents are re-mortgaging their own property or that the guarantee they sign is effectively giving the bank dibs on their French property or some such arrangement. At least that's how it is with German banks...they will not lend directly on Irish property as security simply because they have no infrastructure in place in Ireland to handle the legals or even assess a fair market worth etc. It doesn't matter though, as long as the GF can access the funds at much better rates, then it's a no brainer (for her, the parents would be well advised to think it over as their home may depend on the vagaries of the Irish economy!!)

Peregrinus

murphaph wrote: »

I'd have to thoroughly disagree with that. The currency a bank lends a mortgage in is of little interest in calculating the risk to the bank, which is all the mortgage interest rate is really a function of.

Well, no. The mortgage rate is first and foremost a function of the cost of funds to the bank. And Irish banks and French ones have basically the same cost of funds. Which is why, all other things being equal, you'd expect Irish and French (and all other Eurozone) banks to have similar mortgage rates.

But I take your point that all other things are not equal. The margin the bank takes, over and above the cost of funds, reflects the costs of operating in the market, which may vary from market to market, and the risk the bank bears, which may also vary from market to market. And if it's true that in the french market lenders banks can enforce their security much more quickly and cheaply than in the Irish market, yes, that would suggest that borrowing will be persistently cheaper in France than in Ireland.

I agree with you, of course, that the French lender in this case doesn't see itself as lending on the strength of an Irish security, but rather on the strength of a French security, and if the OP's girlfriend falls behind in her payments their first recourse will not be to try and enforce their security in Ireland, but to call on the girlfriend's parents, and then enforce the security which they undoubtedly have over their house. That, of course, will put great moral pressure on the girlfriend immediately to sell her Irish property and clear her loan, to avoid the eviction of her parents.

In other words, unless she is fairly heartless and selfish (and I'm sure she's not) she won't get the benefit of the relatively relaxed Irish environment for those in mortgage strife. She'll get the lower French interest rates, but also the immediate collapse if she is financially stresssed. Which may be a trade-off that she is happy to make.

gaius c

Peregrinus wrote: »

Well, no. The mortgage rate is first and foremost a function of the cost of funds to the bank. And Irish banks and French ones have basically the same cost of funds. Which is why, all other things being equal, you'd expect Irish and French (and all other Eurozone) banks to have similar mortgage rates.

But I take your point that all other things are not equal. The margin the bank takes, over and above the cost of funds, reflects the costs of operating in the market, which may vary from market to market, and the risk the bank bears, which may also vary from market to market. And if it's true that in the french market lenders banks can enforce their security much more quickly and cheaply than in the Irish market, yes, that would suggest that borrowing will be persistently cheaper in France than in Ireland.

I agree with you, of course, that the French lender in this case doesn't see itself as lending on the strength of an Irish security, but rather on the strength of a French security, and if the OP's girlfriend falls behind in her payments their first recourse will not be to try and enforce their security in Ireland, but to call on the girlfriend's parents, and then enforce the security which they undoubtedly have over their house. That, of course, will put great moral pressure on the girlfriend immediately to sell her Irish property and clear her loan, to avoid the eviction of her parents.

In other words, unless she is fairly heartless and selfish (and I'm sure she's not) she won't get the benefit of the relatively relaxed Irish environment for those in mortgage strife. She'll get the lower French interest rates, but also the immediate collapse if she is financially stresssed. Which may be a trade-off that she is happy to make.

And that cost will or at least should factor in the risk that the money is lost.

Peregrinus

gaius c wrote: »

And that cost will or at least should factor in the risk that the money is lost.

No, that shows up in the margin that they add for risk.

The cost of funds is what it costs the bank to borrow the money that they lend on to you. For any two banks with who borrow in the same capital markets the cost of funds is identical.

Marcusm

Peregrinus wrote: »

No, that shows up in the margin that they add for risk.

The cost of funds is what it costs the bank to borrow the money that they lend on to you. For any two banks with who borrow in the same capital markets the cost of funds is identical.

Speaking as a former MD in Global Markets, that is completely rubbish except to the extent of programme funding from central banks, ie repo funding where the quality of the collateral is the principal security. Both the quantum and rates available to Irish banks is dependent on their credit quality and that of Ireland. From 2006 onwards we weren't even accepting Irish govt bonds as collateral without substantial haircuts and my ability to market to Irish banks was severely hampered by institutional unwillingness to take significant risk on the Irish economy - this was 2 years before the bank guarantee. That attitude became widespread after 2008 and will not change for a long time.

Peregrinus

Marcusm wrote: »

Speaking as a former MD in Global Markets, that is completely rubbish except to the extent of programme funding from central banks, ie repo funding where the quality of the collateral is the principal security. Both the quantum and rates available to Irish banks is dependent on their credit quality and that of Ireland. From 2006 onwards we weren't even accepting Irish govt bonds as collateral without substantial haircuts and my ability to market to Irish banks was severely hampered by institutional unwillingness to take significant risk on the Irish economy - this was 2 years before the bank guarantee. That attitude became widespread after 2008 and will not change for a long time.

Are you saying that Irish banks are more reluctant to take a risk on the Irish economy than French banks are? The cost of capital to Irish banks is not related to the investments they make or to their willingness to invest in Irish govt bonds - it's related to what they have to pay to borrow money, surely? Is it the case that Irish banks have to pay more to borrow money than French banks do?

Marcusm

Peregrinus wrote: »

Are you saying that Irish banks are more reluctant to take a risk on the Irish economy than French banks are? The cost of capital to Irish banks is not related to the investments they make or to their willingness to invest in Irish govt bonds - it's related to what they have to pay to borrow money, surely? Is it the case that Irish banks have to pay more to borrow money than French banks do?

I'm stating as a fact that the cost of debt and equity capital to Irish banks us higher than those which have not undergone a Troika programme. I live and work in London, have done for 20 years. The cost of funding and restricted sources and volumes available to Urish banks have a direct relationship to Irish retail interest rates as does, for example, past mistakes such as unlimited tracker mortgage availability.

Peregrinus

Right, so. Well, that's a structural factor suggesting that for some time to come the mortgage rates offered by Irish banks will be materially higher than those available from French banks. Which in turn suggests that it may pay the OP's girlfriend to incur the likely higher initial cost of borrowing from a French bank.

But she still needs to bear in mind the factor that her ability to do this is dependent on her parents' guarantee (and, I think, the security they have granted or will grant over their own property in France), and the implications this will have for her should she find herself in mortgage strife. If she borrows in Ireland she may pay more, but she does have the latitude available under the Irish system.

Marcusm

Peregrinus wrote: »

Right, so. Well, that's a structural factor suggesting that for some time to come the mortgage rates offered by Irish banks will be materially higher than those available from French banks. Which in turn suggests that it may pay the OP's girlfriend to incur the likely higher initial cost of borrowing from a French bank.

With the greatest respect, the emboldened text is what would generally be regarded as a blinding glimpse of the obvious. Structurally, even if Ireland had not undergone such a severe "correction" a small market would always attract a pricing premium.

But she still needs to bear in mind the factor that her ability to do this is dependent on her parents' guarantee (and, I think, the security they have granted or will grant over their own property in France), and the implications this will have for her should she find herself in mortgage strife. If she borrows in Ireland she may pay more, but she does have the latitude available under the Irish system.

In relation ot the later part, I think that will depend on particular circumstances and the nature of the parental guarantee. If it is a first claim guarantee then I would agree but if it is a shortfall guarantee then she would still rely on the dysfunctional Irish enforcement scenario.

Peregrinus

Marcusm wrote: »

In relation ot the later part, I think that will depend on particular circumstances and the nature of the parental guarantee. If it is a first claim guarantee then I would agree but if it is a shortfall guarantee then she would still rely on the dysfunctional Irish enforcement scenario.

If the French bank is acting rationally, they shouldn't be giving the OP's girlfriend the benefit of interest rates reflecting levels of risk in the French market unless they are only exposed themselves to the levels of risk that prevail in the French market. So I think that they should only offer her this deal if they have a first claim guarantee secured on a French property.

But, of course, banks don't always act rationally. So it could be that she is getting a deal which is underpriced for the risk that the French bank is taking. I just wouldn't assume that she is.