The Brexit agreement did not cover financial services which has made for a bumpy start to 2021. From a mortgage perspective it is disappointing as the European Mortgage Credit Directive was a framework of conduct rules for mortgage firms across the EU and these were fully implemented in the UK in 2016.

The lack of clarity means some banks in both the UK and Europe have taken the decision to no longer lend to Europeans buying in the UK or British residents buying in Europe. Others have taken independent advice to establish the parameters in which they can still lend and are still active.

It is a fast-changing landscape, with Spain and Italy passing national directives for an extension before the end of last year which allows business to carry on until June or later this year. At the time of writing, Portugal, Ireland and Liechtenstein have granted equivalence back to the UK so it is clear there is interest in a seamless transition to ensure continuation of business in some countries more than others.

The notable exception to date is France. There are still French banks which can offer mortgages to British residents but the majority do not. Thankfully, for properties of €3 million+ there are private banks in Luxembourg, Monaco and Geneva which provide attractive terms for prime locations in France. More modest projects, not in prime locations and property that is rural are, however, increasingly difficult. New-build developments may also not be as straightforward as there is extra scrutiny and the banks have a quota system.

Banks have not changed standard affordability criteria but there is caution. Bonuses are rarely taken into account and certain sectors raise red flags. For many buyers, matching the currency of the asset (the property) and the liability (mortgage) with a euro mortgage offsets some of the uncertainty so the full balance of the purchase and costs doesn’t need to be converted using today’s exchange rate. With low interest rates, many buyers like having the flexibility to repay the mortgage in future when the fortunes of sterling may have improved.

Furthermore, there may be tax benefits as the mortgage will be clearly secured on the property. In France, the Wealth Tax or Real Estate Wealth Tax ('impȏt sur la fortune immobilière', or IFI) is an annual tax payable when the total value of the real estate assets is greater than €1.3 million and there is a sliding scale of annual tax ranging from 0.5 to 1.5 per cent. A mortgage secured on the property will reduce the net value of the asset and if below this threshold no annual wealth tax will be payable.

Looking at the challenges facing all governments, wealth taxes may well be more a feature of tax planning in Europe in future so having a mortgage in place is a sensible precaution. A loan taken in the UK to buy the property would not gain relief from this tax as the mortgage must be secured on the property itself. 

• Miranda John is Director of SPF Private Clients 

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