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Property finance and mortgages for properties in Monaco and the Cote D’Azur
Property finance is available from selected banks in Monaco and along the Cote d’Azur for properties in either location(see Banking in Monaco). The finance offered can be tailored specifically for the property buyer’s requirements.
In Monaco, the method of financing requires the property purchaser to bring assets to the lending bank for a minimum of 50% of the purchase price of the property. The more assets the client can bring to the lending bank, the more the bank can lend for the property purchase and the better the financing costs are for the borrower.
Generally the maximum term a bank will extend the loan for is 5 years, but this can be renewed at the end of each 5 year term, generally for a maximum of 15 years. The assets can be either placed on a term deposit bearing interest or may be invested into a conservative portfolio to produce an annualised return that can either partially offset , or in some cases, fully offset the financing costs. The investment portfolio can be structured to include fixed interest bearing securities (bonds) or a balanced portfolio of bonds and high quality dividend bearing equities. The bank will charge an annualised management fee of approx. 0.50% for a fixed income portfolio and may be slightly higher if the portfolio includes equity. The amount of collateral required to be put up by the client will depend upon the type of investment portfolio he or she decides to invest the collateral into. The collateral may be in any major currency if the client does not wish to hold the collateral in Euros which will be the currency of purchase.
The banks in Monaco can lend a minimum of 50% and up to 100% of the property purchase price (subject to a bank approved valuation of the property) for a lending rate based on the current 3 month Euribor rate , plus a fixed annual interest charge of between 1.7-2.5% This is subject to variation and depends upon a number of factors such as the amount of collateral the client has with the bank, the lending value of the invested portfolio, the existing relationship (if any) the client has with the bank and the property itself. There will also be a fee for the administration of the loan process (frais de dossier) which is generally set at approximately 0.25% -1% of the loan amount. If the client chooses the rate can be fixed rather than a floating rate. This will depend on the current level of interest rates and other factors, such as the amount of collateral placed by the client, the property and the term of the loan.
This formula also applies to properties along the Cote d’Azur from Menton to St Tropez. Some banks will also lend for property purchase in other parts of France and also in selected Ski Resorts such as Courchevel, Val d’Isere, Megeve and some of the smaller resorts in the Mountains behind the Cote d’Azur, such as Isola 2000 and Auron.
A client relocating to Monaco, wishes to buy a property in Monaco for €5,000,000. The client has available €2,500,000 to bring as collateral to the bank. The client wishes to borrow as much as possible, for as long as possible (max initial term of 5 years) for the €5 million purchase and to offset as much of the finance (interest) cost as possible- whilst preserving his capital.
The bank places €2,500,000 into a fixed income portfolio with an average maturity of 5 years, to match the term of the loan. The bonds in the portfolio produce an average annualised return of 4%. The lending value of the bond portfolio is set at 80% so therefore the bank can lend €1,750,000 against the invested part. The bank may then lend additional funds ( subject to bank policy) to fund the purchase or €3,250,000. The cost of the loan is as follows (example only and subject to change).
Loan of €5,000,000 (€1,750,000 loan on invested bond portfolio + mortgage/loan of €3,250,000) at a rate of 3 month Euribor ( e.g. 1%) + 2% = 3% per annum
One off admin fee of 0.25% = €12,500
Bond portfolio of €2,500,000 with an average maturity of 5 years, invested to produce annualised return of 4%, less the investment management annual fee of approx 0.50% Annual Bond Income = €2,500,000 x 4% = 100,000, less 0.5% = net income of €87,500
Annual loan charge = 3 month Euribor + 2% or in this example 1% + 2% = 3% or €5,000,000 (full loan amount) x 3% = €150,000 annual interest charges.
Interest charges of €150,000 per year are partially offset by the bond income of €87,500 leaving net interest of €62,500 to pay (in this example). This compares well to a typical mortgage structure of borrowing 60% and putting up the remaining 40% or €2,000,000 and paying the full interest charges on the 60% at e.g. 3% or annual interest charged of €90,000 one can make a good saving of €27,500 per year in the example given. (In the first year only, one would deduct the admin fee of 0.25%).
The more the client can bring to the bank the more the loan interest charges can be offset.
If the client wishes to fully offset the interest charges in the above example, the client would need to bring 120% of the full purchase price of the property in assets to the bank.Example:Client brings €6,000,000. This is invested into a bond portfolio to produce a net annual yield of 3.5% (inclusive of all management fees).
€6,000,000 x 3.5% = €210,000
The loan interest charges are as in above example- 3% per annum or €5,000,000 x 3% = €150,000, plus the admin fee of €12,500.
€210,000 - €162,500 = €47,500 positive cash flow . In year 2 onwards, the net income would rise to €60,000.
This compares well to placing the lower amount of collateral which produces a lower return. The more collateral the client can bring to the bank, the more negotiable the loan terms will be.
Equity Release for properties in Monaco and on the Cote d’Azur.
Generally the banks will lend up to 50-60% of the property value, as long as there is no existing loan or mortgage held against the property. The bank will require some collateral to be deposited in advance of the equity release, between 25-50% of the equity release amount.
Client has a property valued at €5,000,000 with no existing borrowings.
The bank will lend up to 50% of the property of €2,500,000. The bank requires the client to bring assets of a minimum of this amount or €1,000,000. This can be invested as detailed in the previous example to produce an annualised income to partially offset the interest charge of the loan.
Selected banks will offer mortgages against French property for a maximum value of 70%, depending on the location and condition of the property. The client will be required to place a deposit of the balance, in this case 30%. The interest rate charges with this type of mortgage are generally higher than in the straight loan example given previously. Typically the rates can be variable or fixed; both set a predetermined interest rate over the current 3 month Euribor rate. Rates set above the 3 month Euribor can vary from between e.g. 2.75 – 4.5 %. The maximum mortgage term can be longer in this structure, up to 25 years. The borrower or mortgagee will be required to set up a French life insurance contract (assurance vie) for the duration of the mortgage.
It is important to note than when buying properties in France it is beneficial to the purchaser, under the current tax structures, to finance as much as possible of the property purchase price. This is for both wealth and future inheritance taxes. The client should take tax advice before making a purchase in either Monaco or France. Even if the client is a resident of Monaco, there may be inheritance tax consequences to consider depending upon the client’s circumstances.
For details of the banks offering the most competitive property finance/mortgage rates in Monaco and France , as well as details of qualified tax advisors in both France and Monaco please fill in the contact form.