Financing your dream home: French mortgages explained

The style of property you are planning to buy in France and the location it is in can determine the mortgage conditions you are offered, as Simon Smallwood explains

This is the first in a series of French mortgage articles which will look at the different factors you need to consider, from a French mortgage perspective, when looking to finance the purchase of your dream second home in different regions of France.

As is the case in many markets, mortgage providers will tailor their products not only to the financial situation of their potential borrowers but also the type of properties they are looking to buy. Exactly the same situation exists in France and here we are going to look into this in greater detail.

The French Alps have long been a popular destination for international second-homeowners. The European Alps are arguably the number one skiing destination in the world and property prices in the region reflect this. A wide variety of resorts provide everything from an entry level €100,000 studio to a €30 million chalet, with everything in between.

Demand for property in this part of France has also remained consistent in recent years, and with limited new supply coming onto the market prices have remained solid.

In the last 12 months, increasing confidence among potential buyers has seen this interest accelerate. With a temporary easing of planning restrictions in some resorts and more bullish buyers the market is warming up nicely. All of these factors make the French Alps a great area in which French mortgage providers like to lend.

LENDING OPTIONS

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If you are considering using a French mortgage in order to finance the purchase of your property in the Alps, there are two groups of banks that will lend against property in the region – French retail banks and private banks.

Private banks will provide a finance facility, however the borrower is required to place investments with the bank to develop a wider private banking relationship. They are not interested in providing a stand-alone mortgage to potential borrowers. They will typically lend a minimum of €1.5m at a loan to value (LTV) of around 60% – ensuring a minimum purchase price of €2.5m.

Not all private banks will lend against property in the Alps and those that will only provide finance in certain resorts within the region. Furthermore, private banks are generally not comfortable providing finance against properties that are in the process of being built, or for construction projects.

Despite these restrictions, the advantage of borrowing via private banks is that they are more flexible in terms of the information they require to make a decision and the types of individuals they will lend to. They will typically lend on an interest-only basis with rates below 2% (at the time of writing).

The French retail banks will have little or no restrictions on the resorts in which they will lend and they will also be comfortable providing finance against a much wider price range of property. Where there are restrictions is in the financing of off-plan and leaseback properties. One side effect of the financial crisis is that French mortgage providers have become more cautious when lending against these types of properties. In the past many buyers of leaseback properties have been doing so for investment, rather than to purchase the property as second home.

During the downturn the French mortgage providers have seen the highest levels of defaults from borrowers who have purchased property for investment. Furthermore, a number of developers and/or management companies have gone out of business during this difficult period, placing further scrutiny on the backers of the new schemes.

TYPES OF PROPERTY

If you are looking to purchase a new leaseback property it is important that you confirm that the scheme you are considering is approved by the French lenders. Should the scheme not be approved, it may simply be that it is too new to have gone through the approval process. If this is the case a good French mortgage broker will be able to look into whether the scheme can be approved by different banks. Whether or not the scheme will be approved will depend on the financial strength of the developer and the management company.

French mortgage providers typically favour developments from the larger, more financially secure developers, and will typically lend up to 70% of the net purchase price for the purchase of a leaseback property.

Purchasing and renovating a property or buying a plot of land and completing the construction from scratch are popular options in this part of France. There are a few quirks about this type of financing that you will need to be aware of.

Firstly, if you are looking for the bank to finance the renovation/construction work then the work will need to be carried out by bank-approved contractors. The most important factor for the lender is that these contractors have sufficient insurances in place to ensure that the work will be completed should they run into financial difficulty and be unable to complete the work themselves.

Secondly, your contribution to the purchase price will need to be made before the lender’s funds are drawn down. Typically it will be possible to finance a maximum of up to 85% of the final value of the property and the construction costs.

The timing of the purchase of a property in the Alps is often focused on ensuring that everything is completed before the start of the upcoming winter season. It normally takes around 12 weeks to arrange a French mortgage although it can be done substantially quicker than this – so there is still time to complete a purchase before the 2014/2015 winter season if you are quick!

The French Alps is one of the strongest regions for the French mortgage providers, with robust prices and interest from potential buyers. With French mortgage rates at historic lows and confidence among prospective buyers growing, there has never been a better time to consider the purchase of a property in France.

To ensure that the buying process runs as smoothly as possible, ensure you take professional advice on each aspect of your French property purchase.

Simon Smallwood is business development director with International Private Finance

Tel: 020 7484 4600

www.internationalprivatefinance.com