A solution to the exchange rate penalty for Americans buying in Paris!

Bonapart's long-term mortgage partner, France Home Finance have informed us of a new bank product that solves the exchange rate penalty for Americans or Brits buying in Paris.

The buyer borrows 100% of the purchase price and the bank requires 25% of the loan amount to be placed in a portfolio as a bond (the client can’t withdraw the funds while the mortgage is outstanding but keeps any gains on investment generated). If the buyer wishes to finance the notaire fees as well, the deposit needs to be 33% of the loan amount.

The big news is that this money can be placed in dollars or pounds (or any other currency) therefore NO exchange rate loss for the investor. The portfolio is required to have a minimum of 80% of the placement in money markets (to be sure money is not lost) and up to 20% in stocks, the expected annual return therefore not more than 5 to 6%.

Fees are:
- Entrance Fees (for the mutual funds) : 0,5 to 1,5 %
- Droits de garde : 0,25 % per annum
- Management fees : +/- 1 % per annum

The funds management bank is a very old respected bank that is affiliated with Credit Agricole therefore solid. The mortgage payments will of course be paid in euros but this could be covered by the rental payments coming in euros.

France Home Finance is an American, British and French team of former consumer and commercial finance bankers based in France. When it comes to dealing with risk-averse French banks, it pays to have experts on your side. They have relationships with a wide range of lending partners which ensures great rates. For Bonapart's clients, they have proved time and again that they can truly simplify this often complex process. From the approval "in principal" at the beginning of the project to supporting the buyer through until closing, they'll be in constant contact making certain everything is in order and delivered to the Notaire on time. We count on their experience to have your French mortgage processed correctly and efficiently.

Comments

[Bob Spencer]

So you're saying that if the asking price of the place is €400,000, we can deposit 100,000 DOLLARS instead of €100,000? If not, what's the difference where or how you exchange the dollars for euros?

[susie hollands]

you must deposit the dollar equivalent of 25% of the purchase price (or about 33% if you also want to finance the notaire fees). For the example of a purchase price of 400,000€, that would be 100,000€ or 148,250$.

[nicolas]

you still have to repay the euro at some point in time.
say you all repay them in the end, in 10 years. you will have in 10 years go in the market and buy euro against your dollar.
if euro went further up, you will have to pay more dollar, if euro goes down, you will end up paying less.

one way to cover this would be to buy today a EURUSD forward contract, whose price is essentially the spot fx rate (offseted by interest rate differential, but let's forget this as it a completely different matter)

Point is, you still actually pay for the exchange rate if you want your transaction to be hedged, aka to have no uncertainty about the total cost of your ownership.

Developping on this idea, the plan situation is equivalent of a hedged position, where you buy the future EURUSD rate (and the spot rate along with it), combined with a short of the EURUSD future rate for (3/4 of ) the transaction.

From a finance perspective this is not a magic position, and there is NO WAY you can escape the current exchange rate, be it through spot or delayed transaction.

That being said, the plan can be good in 2 ways:

- if you eventually plan to sell back your house before repayment, then this product is good, as the proceeds of your house, in EUR, will be able to match the loan payback, in EUR.

- if you plan on EUR income form work or stuff to payback the loan. but then if you trasnfer back to usd, you'll still be applied fx rate, although USDEUR and not EURUSD :)

By doing so, you are in the position of any EUR based person who does not care about the fx rate market : you dont care about the short EUR, as you will generate the EUR yourself (through resell or earnings)

But again, this plan does not allow you ever to escape the current EURUSD rate.

[susie hollands]

thanks nicolas for this further analysis