Bricks and mortar

Jo Cowling has mortgage advice for a reader who wants to build their dream home in France…

Q. I’d like to build a house on some land I own in Brittany and am considering financing the construction using a French mortgage. Can you explain the options available and any pitfalls I need to be aware of? Elliot Lawrence, BedfordA. There are a number of financing options available when you are considering building your own property in France. Here we will look at these in a little more detail.Construction mortgages – that is, loans to raise finance in order to build a property in France – are widely available from a number of lenders. However, the lenders’ criteria vary quite considerably and you do need to be aware that there are some restrictions to bear in mind.Financing the purchase of the plot of land may be possible if the land is correctly licensed and has the necessary permissions in place to build the type of residential property required. If you are looking at financing the purchase of the land, there will often be additional caveats to ensure that the construction work of the project as a whole will be completed within certain time frames (normally around 2 years).If you already own the land you wish to build on, and are just considering financing the construction costs of the project, then you will typically be able to finance up to 85 per cent of the final value of the property. In some instances financing for 100 per cent of the construction costs may be available, as long as the amount is less than 85 per cent of the final value on completion.The range of mortgage products that are available for construction finance is very similar to those on the market for a normal-purchase mortgage. This means that both straight repayment and interest-only loans are available. Additionally, in some cases it is possible to have an interest-only period or a total deferral period during the construction stage of the project before reverting to a standard repayment mortgage once the property has been built.Fixed-rate productsA popular option is to defer the payments of the mortgage during the building process – this can be attractive if you are hoping to rent out the property and use these rental payments to cover the majority of the mortgage. You will need to be aware, however, that lenders may add a small premium to the interest rate due to the increased flexibility of this type of financing, and you will still end up paying the interest you have deferred in the end, it will not disappear!Fixed- and variable-rate mortgages are both currently available, with initial rates for variable products starting as low as 2.5 per cent. There is a wide range of fixed rates available: both UK style’ shorter-term 1, 2, 5 and 10 year fixed-rate products, alongside the more popular full-term French style’ fixed-rate product where the interest rate will be the same for the entire term of the mortgage.Another major requirement for construction finance is that all work needs to be carried out by registered French builders and contractors. The reason for this is that the bank will be providing the money based on the end value of the property, following the completion of all building works. This final value will obviously be dependent on the quality of the work that has been carried out; therefore the builders need to be French registered to satisfy the lenders that all work will be carried out to their standards.When you submit your mortgage application to the bank you will need to submit all of the project’s plans and quotes for the work that is going to be carried out. These plans will then be approved by the lender, in addition to them reviewing your own financial profile and your ability to service the finance from an affordability point of view.Personal contributionOnce the finance has been approved and the project is under way, the lender will require any personal contribution from you to be made before the funds are drawn down for the project. Following payment of the personal contribution, the lender will make stage payments directly to the builders at various stages throughout the project.This is one feature of construction mortgages that can sometimes surprise the borrower. The money is released directly to the contractor/project manager on submission of the invoices, rather than to the individual on behalf of whom the property is being built.One final decision that you will need to make is whether to arrange the finance yourself or use the services of a good French mortgage broker. Construction mortgages are more complicated than a straight purchase, primarily due to the amount of paperwork that needs to be produced and the fact that there are more third parties involved in the process (project managers, architects, contractors etc). An established French mortgage broker will have the language skills and knowledge of the process to ensure that everything proceeds as smoothly as possible. A broker will also be able to guide you in the direction of the mortgage lender that will provide you with the most suitable mortgage product, in addition to being able to negotiate reductions in the fees and interest rates that you would pay.If you approach lenders directly yourself, you obviously need to be confident that your situation and project fit their lending criteria and confirm exactly what information is required and at what stages payments will be made.