Mortgages - Funding An Off-Plan Property Purchase in France

Off-plan purchasing has become the preferred option for many investors and holiday-home buyers looking to pick up the best deals from the French property market.

Firstly, off-plan properties usually require a smaller initial deposit of between 2-5% of the full property price at reservation, as opposed to the standard 10% for completed homes. They also incur reduced legal costs of around 3-5% instead of the standard 7-10%.

The off-plan payment process is also popular because it requires funds to be released in structured stages as opposed to a lump sum at the signing of the title deeds. These stages are usually outlined in the preliminary purchase agreement (called a reservation contract in the case of off-plan property) and are based on construction phases.

A typical French off-plan property stage payment structure is as follows:

• 5% at the signature of the reservation contract – this takes the property off the market.
• 25% at signature of the title deeds – you are then the official owner of the property (the foundations will have been completed on most properties by this stage).
• 30% when the ground floor slab is completed.
• 10% when the roof is fitted.
• 20% when the internal partitioning is finished.
• 5% when the building work of your property is completed.
• 5% when the keys are handed over to you (following all inspections).

Refurbished property operates with a similar type of payment structure whereby the purchaser pays a certain percentage on reservation and signature of the title deeds, followed by a further two or three payments while the property is being refurbished.

Releasing mortgage funds
Mortgages available on off-plan and refurbished property vary from those offered on standard purchases in order to fit in with this layered payment structure. An off-plan mortgage will be structured in similar stages so that funds are only released as and when required, rather than the full amount at signature of the title deeds as is standard practice. This means that interest will accrue only on the growing balance rather than full mortgage amount, alleviating any unnecessary charges that would have incurred if the full mortgage amount was released. Historically, lenders have charged an administration cost for releasing funds in this way, but most lenders have now scrapped these charges.

Buy now, pay later
Of the lenders providing off-plan property mortgages, most offer a deferral option. This means that although you may be using funds from your mortgage, the lender will defer repayment so you have nothing to pay during the construction of your property. Some lenders will even offer to extend this deferral period beyond completion of a property in order to give purchasers the chance to use rental income to help pay the mortgage.

Life insurance to cover the mortgage is compulsory and with most lenders a French life insurance policy will be automatically set up for you. Typically, life insurance payments cannot be deferred and buyers will be required to pay each month during the construction of the home. One French lender, however, has recently introduced an off-plan property mortgage which allows the deferral of both mortgage and life insurance payments during construction, meaning that borrowers pay absolutely nothing until their property is complete.

The period during which mortgage repayment is deferred is often referred to as a ‘grace period’, the length of which varies from lender to lender. Some lenders will allow it to continue up until the day the property is delivered to the owner irrespective of the length. Others offer set periods, for example 12, 24 and 36 months, which can be reduced by the borrower if they wish but not extended.

The length of grace period that a borrower requires will depend on the intended delivery date of their property. During this period any interest that accumulates on the released funds is added to the borrowed funds as it is not being paid off by the borrower. This means that the amount of interest that is charged each month is calculated on the funds that have been released from the mortgage to that point, plus the interest that was deferred the previous months.

The period discussed above is referred to as a ‘full grace period’ as the full mortgage repayment amount is deferred (and only life insurance needs to be paid each month in most cases). However, off-plan property mortgages can include a second type of grace period in order to avoid an interest pile-up.

A ‘partial grace period’ can be taken which allows borrowers to defer the repayment of capital but pay any interest that has accumulated on the funds released from the loan each month. This means that the total amount of funds borrowed does not increase each month as it does with a full grace period.

The monthly interest during a partial grace period will be smaller at first as the interest charged will only be calculated on the small amount of funds that are released from the mortgage at the early stages. As each stage payment is paid from the mortgage, the amount of interest will increase, breaking borrowers in gently to their mortgage payments before they are finally required to repay capital on the full mortgage amount.

Some lenders will include the grace period in their offered term while others will allow borrowers grace in addition to the loan term. For example, a maximum loan term of 20 years may be offered with a grace period on top, allowing the borrower a full 20 years in which to repay their mortgage. Other lenders will include it within this 20-year term, meaning the borrower only has 17, 18 or 19 years to repay their mortgage (depending upon the length of their grace period).

Interest rates
A final bonus of off-plan property mortgages is that most lenders offer fixed discounted interest rates during the grace period. Typical rates for this period are fixed between 3.7% and 4.2%, giving borrowers a welcome sense of security while their property is being constructed.

• Katy Hepworth, overseas mortgage manager, Assetz Finance Tel: 0845 400 8000 www.assetz.co.uk

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