Mortgage outlook for 2010

By anyone’s standards, 2009 will go down in history as a momentous year in the world of banking! We can now look back at 12 months in which many financial practices and systems, previously thought to be central to the health of the global economy, proved to be the main cause of unprecedented levels of turbulence across the financial sector.

With regards to European mortgage markets, the year saw huge swings in the availability of products and the length of terms on offer. Having carried out the second of International Private Finance’s annual surveys of the international mortgage market, we are going to take a brief look at what has happened over the past year and give you an insight into the thoughts and predictions of the major French lenders for the year ahead.

LENDING CRITERIA

As briefly mentioned above, the most striking feature of the French mortgage market in 2009 were the significant, rapid alterations to product availability and lending criteria. While the French banking system and mortgage lenders were undoubtedly less affected by the global troubles than their counterparts in the UK, there were still major ramifications to be felt from the economic downturn.

As the year commenced, mortgage margins – the interest rate that banks charge above the central Euribor base rate – were generally around 1.2%. However, by early May these had risen as high as 2.75%, which serves as a clear indication of significant increases in the cost of raising funds in the interbank market.

Furthermore, lenders also started to restrict the terms offered on those mortgage products perceived to be of higher risk. As a general rule, mortgage lenders in France take a more conservative approach to risk than those in the UK and USA. As a result of the market restrictions, the lending criteria for equity release and interest only products were tightened even more.

MORTGAGE MARGINS

By the end of the summer, however, the market showed signs of recovery with margins starting to be reduced and some lending criteria starting to ease. By the year’s end, margins on French mortgages had reduced significantly, if not quite dropping back to the levels seen at this time last year. Nevertheless, this slight increase in the cost of borrowing euros has been compensated for by the significant reduction in Eurozone base rates.

In addition, at the end of the year the availability of non-resident mortgage products in France had actually improved. By the end of 2009, 100% mortgages were available for larger loan amounts, complementing other additions to the lenders’ product ranges that had been made during the year.

OUTLOOK FOR 2010

At the time of writing, the general consensus for the European economy in 2010 is cautiously positive. Many people feel that 2009 did not turn out to be the catastrophe it could have been, and there are tentative signs of improvement as we enter the new decade.

The initial results of the International Mortgage Outlook 2010 (IMO 2010, which includes the French Mortgage Outlook 2010) support this view, while indicating that there are still significant uncertainties which potential borrowers should bear in mind. Two of the major indicators for the year’s developments lie in the lenders’ predictions for interest rates and exchange rates.

As far as interest rates are concerned, 75% of the French lenders who participated expect the Eurozone base rates to finish 2010 at between 2.25-2.5%. This is consistent with many Eurozone economists, who expect the ECB to raise interest rates more quickly than is expected for the UK. Assuming margins are around 1.5% by the end of 2010, a European base rate of 2-2.5% would give variable mortgage rates of between 3.5- 4%. This would still be fairly low by historical standards.

DIFFERING OPINIONS

Compared to interest rates, IMO 2010 shows French lenders to be decidedly uncertain with regards to forecasting exchange rates for the year ahead. There are as many French lenders who predict the euro/sterling exchange rate to finish the year at parity (a rate of €1/£1) as who think it will finish at almost €1/£1.30! Perhaps unsurprisingly, the majority think it will finish near the current level of around €1/£1.10.

Important conclusions can be drawn from this uncertainty. It is difficult to foresee how the process of economic recovery is going to fare, and therefore what levels of interest rates will be appropriate across the developed western economies. Furthermore, unprecedented levels of financial stimulus, such as quantitative easing, have also clouded the horizon and it is unclear what effects these stimuli will have on inflation at a later date.

THE ELECTION EFFECT

Also casting a shadow over events with regards to the exchange rate, is the upcoming general election in the UK. The opposing stances of the two major parties on public spending would obviously have very different consequences for the UK’s economy, so it is difficult to predict the strength of the pound without knowing the outcome of the vote!

What is a little clearer are the French banks’ expectations for their own property and mortgage markets over the coming year.

The robust performance of the French property market has been noteworthy throughout the recent troubles. In the dizzy heights of the property boom at the start of the millennium, exotic countries from South America to South-East Asia were touted as possible locations for second-home buyers. Property prices soared at these new fad destinations while the more traditional markets, particularly where development and building had been more measured, were often overlooked.

FRANCE ON TOP

When the global economy first experienced difficulties, the principal reaction was a ‘flight to quality’ with regards to interest in second homes abroad. The French market proved to be the major beneficiary. Reflecting the conservative approach of their mortgage lenders, the relative prudence of the French property market during the boom years meant that this market was far better prepared to withstand the international downturn than those aforementioned developing regions.

The French banks expect their property market to continue performing resiliently during 2010. All of the lenders surveyed expect French property prices to either stay at current levels or increase during 2010. Almost two-thirds expect increases of up to 5% of current value.

MORTGAGE AVAILABILITY

One of the major fears holding back the UK property market is the availability of mortgage finance. As we’ve already touched upon, French banks are in a more stable and confident position than their UK and US counterparts. As a result, the lenders’ optimism for the property market is reflected by positive predictions regarding non-resident lending levels during the coming year.

All of the French lenders who took part in IMO 2010 expect to increase or maintain their levels of lending during 2010, with an impressive 60% expecting to increase their lending levels when compared to 2009. The same amount of lenders expect to expand their product range during this time, with no lender anticipating a drop in product availability.

The lenders also outlined their attitudes towards the evolution of their range of mortgage products. Three-quarters of the French banks who provided an insight pinpointed more flexible LTVs (loan-tovalue ratios) as being their priority for product development. All of the lenders included improved interest-only terms among their top three product development selections.

HIGH-VALUE MORTGAGES

The recent fluctuations in both exchange rates and interest rates have increased the interest in securing a euro mortgage against a property in France. It is becoming increasingly widely recognised that having euro debt secured against a property owned in France can have positive implications for both wealth tax and protecting exposure to movements in exchange rates. As a result, raising finance in this way is viewed as a shrewd feature within the overall financial planning strategy of a UK investor.

This is reviewed by a new section in the French Mortgage Outlook for 2010, which looks at the options for loans of over €1 million in France. The good news is that 75% of the French lenders who took part in the report are looking to further increase their exposure to larger loans sizes (€1 million plus) during 2010.

This should be good news for buyers who are looking either to use a French mortgage to offset potential wealth tax obligations or for those who are choosing to take out a flexible euro mortgage to offset the sterling cost of completing a purchase in France. Indeed, the lenders confirmed that the most common reason for their wealthiest clients to arrange a mortgage is based around their financial planning strategy.

A POSITIVE OUTLOOK

From a general perspective, improving levels of mortgage lending, a solidly performing property market and increasing interest as a second home location all point to a positive outlook for the French property and mortgage markets during 2010.

Furthermore, turbulence in the foreign exchange markets and low interest rates continue to highlight the comparative peace of mind that using a French mortgage can provide when completing the purchase of your dream second home abroad. The overriding message from the French Mortgage Outlook 2010 is that French banks have positive expectations for the French mortgage and property markets; they are looking to maintain or increase their lending levels and are aware of the key products that non-resident borrowers would like to see developed.

For further information or to request a free copy of the complete International Mortgage Outlook 2010, contact International Private Finance on 0207 484 4600 or visit www.internationalprivatefinance.com