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Last Updated: Monday, 8 December, 2003, 08:46 GMT
French leave flourishes on fixed rates
By Megan Rowling
reporting from Céret, France

Gordon Brown is keen to encourage housebuyers to use fixed-rate mortgages to reduce boom and bust in the UK housing market. As he prepares to announce a major review of the mortgage market ahead of the pre-Budget report, BBC News Online looks at the French experience.

Estate agent in Ceret France

British and French mortgage markets may not have a lot in common.

But down a bumpy track in a sleepy, leafy valley in the southernmost part of France, their differences are being put to good use.

Pascale Morvan and her British partner Gavin, both in their 30s, bought their picturesque villa, resplendent with an outdoor kitchen, swimming pool and babbling brook in the garden, for around 280,000 euros (£196,000, $336,000) last year.

I don't like being dependent on the financial markets, and I don't want to take risks.
Rémy Cursio
To pay for it, Gavin took advantage of buoyant UK house prices by re-mortgaging and withdrawing equity from his property in London, while Pascale opted for her first home loan in France.

As a teacher, she qualified for a favourable loan-guarantee system on offer to civil servants, and after shopping around, settled for a 15-year deal at a fixed rate of just over 4%.

Fixed-rate fixation

Gavin, with his UK variable-rate mortgage, and Pascale, with her French fixed-rate loan, represent a major difference between the home loan markets of the two countries.

Pascale Morvan: Happy with fixed rates
Pascale Morvan: Happy with fixed rates after shopping around
In Britain, around 60% of mortgages are variable rate, whereas in France, the figure is only 20%.

French homeowners are much more likely to chose longer-term, fixed-rate products, despite their higher upfront costs.

"When I went to talk to banks, they always started by offering me fixed-rate products," explains Pascale. "Actually I wanted to hear about variable rates too. But I think they expected that I, like many French people, would prefer the security of fixed rates."

Rémy Cursio, a medical equipment engineer from Chassieu near Lyon, is one of those people.

He bought a new house at the beginning of this year, and recently succeeded in trading in his previous mortgage, a 15-year loan fixed at 5.15%, for a cheaper 12-year product with a different bank - but still with a fixed rate.

"I don't like being dependent on the financial markets, and I don't want to take risks. I think it's better to make the same payments each month. It gives me peace of mind," he explains.

Claude Taffin, director of economic and financial affairs at L'Union Sociale Pour L'Habitat (Social Union for Housing), whose specialist credit affiliate lends in all sectors of the housing market, agrees that risk aversion is the "simplest reason" why the French have shied away from variable-rate products.

He identifies this as a "general attitude" held by consumers towards all aspects of finance, including the stock market.

Bad experiences

It's also a case of once bitten, twice shy.

Once burned, twice shy: variable rates proved too expensive in France
Once burned, twice shy: variable rates proved too expensive
Variable-rate products were first introduced in France in the 1980s.

But high inflation later that decade led to rising interest rates, which saddled variable-rate borrowers with bigger repayments.

"That made people reluctant in the 1990s, once rates had fallen again, to go back to these kind of loans," explains Mr Taffin.

However, he does expect demand for variable-rate products to increase while official short-term interest rates in the Eurozone stay close to their current record-low level of 2%.

UK Worries

Right now, British homeowners certainly appear to have more to worry about than their French counterparts.

See how the UK housing market measures up

Not only do most have mortgages whose payments fluctuate in line with the Bank of England's base rate - which was hiked in November for the first time in nearly four years to 3.75%.

They also owe a lot more.

Mortgage debt in the UK is equivalent to 17,200 euros (£12,000) per person, or around 60% of gross domestic product (GDP), compared with 5,000 euros (£3,500) per person or 20% of GDP in France.

More responsive

This means that UK consumers are very responsive to changes in interest rates.

An index drawn up by economists at Merrill Lynch showed them to have the second-highest sensitivity to interest rates in Europe, whereas French consumers were the least sensitive.

French house prices have been less volatile
French house prices have been less volatile than in the UK
Not surprisingly, this is reflected in the housing market.

"There is a transmission mechanism, which means that house prices are more strongly affected by changes in base rates in the UK", explains Simon Walley, head of economic affairs at the European Mortgage Federation.

"In France they are less susceptible, because loan repayments are less closely linked to interest rate changes.

"There are also lower levels of borrowing, which may be because traditionally, in Southern Europe, debt has not been well regarded and families have passed houses down through the generations," he added.

Boom and bust

Figures from Merrill Lynch certainly suggest that house prices fluctuate more over the course of an economic cycle in Britain: the cyclical volatility of real house prices stands at 16.2% in the UK and only 6.7% in France.

This is a matter of concern for British Chancellor Gordon Brown, who favours a shift towards longer-term, fixed-rate products in order to prevent wild swings in house prices.

The problem, as Rob Thomas from the European Mortgage Finance Agency Project explains, is that "borrowers in the UK don't like being locked in".

He is currently working on a Europe-wide funding initiative that would reduce lenders' own borrowing costs.

The purpose is to allow them to offer long-term fixed-rate products without early redemption penalties, which Mr Thomas describes as the "ultimate consumer-friendly mortgage".

Crédit Agricole, France's biggest mortgage lender, is one of the banks backing the project, and it's easy to see why it might be keen to cut its funding costs.

Easy exit

In France, long-term loans do carry early repayment penalties, but Claude Taffin points out that these are not big enough to deter consumers.

They are limited to 3% of the outstanding capital or six months of interest payments, whichever is lower.

Moreover, the penalty is waived when the repayment is due to non-financial factors, such as the borrower moving house.

And even when that isn't the case, a free exit is sometimes still possible.

From buying to renting

Three years ago, Carole Lefevre, an internet marketing executive in her 20s, obtained a 25-year loan fixed at just under 5%, in order to buy a small flat in Paris.

Thanks to "a very good contact" at the bank, she was able to negotiate a repayment penalty exemption from the start, and so had nothing to worry about when she sold up last year to move into more spacious rented accommodation.

After her first positive experience, Carole plans to get back onto the property ladder next year.

She says she'll be looking for another fixed-rate loan "because you never know what will happen, and if rates start going up, the investment will get more and more expensive."

She's confident she'll be able to get a good deal by shopping around, together with a little hard bargaining.

Even when she signs up to a fixed rate, however, it could actually turn out to be more flexible than it looks on paper.

As Claude Taffin observes, fierce competition among French commercial banks means that, when interest rates fall, they often allow customers to re-negotiate the terms of their fixed-rate loans.

Now that's the kind of borrowing that might tempt even hardened British debt junkies away from their short-term, variable-rate habit.

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