Financing new home purchase (off-plan)

[jules]

How do people finance the purchase of an off-plan property when it is intended to become your permanent home and the funds to purchase it would only become available on the sale of your UK property? Do you just take out a mortgage with the intention of paying it off in full when the property is completed and you can move? Or are there special loans, secured against your UK property, that you can take out specifically for the purchase of off-plan property, which guarantee the funds needed at the various building stages, so you only start paying interest on the money after the payments have been made, and can repay in full early without penalty? The only other solution I can see is to sell the UK property now to release the equity and then move into temporary rented accommodation while the French property is built, but that seems undesirable for several reasons, not least losing out on any gains in the UK property value during the period.

[Andyphilpott]

You can do either! It depends on your relationship/track record with your bank manager as far as raising funds in the UK goes. It is probably easier to prove your means/income to a UK bank if you are (as I assume) UK based at present. On the other hand, interest rates in the UK are higher than those in France.

Whether you borrow in the UK or France just make sure that you are allowed to repay early - some mortgages impose penalties for that.

There will also be the cost of arranging the mortgage including the security required by the bank.

Borrowing in the UK in stages will mean that you run an exchange risk against the Euro on each drawdown so you need to have a view on how exchange rates are likely to move and consider the potential cost (or benefit) of that against the extra cost of interest if you draw the loan in full at the outset and buy Euro's with it ready for your payments. At the moment it would appear to be beneficial to delay the purchase of Euro's but that can quickly change.

Finally you need to consider repayments. A UK bank might well do it interest only for a period so you do not have to make any capital payments. Not sure if a French bank would do likewise, particularly as you will be a new customer to them. Then you get into the realms of proving ongoing income to them - but you will need to do that to an extent to show you can cover interest.

You mention that in selling UK property now you lose out on any capital appreciation but it would protect you against any fall in property values in the UK, however unlikely you feel that to be. But you would have the rent costs so perhaps interest on a loan is a cheaper and easier option anyway.

Andy

[jules]

Thanks for answering, Andy. The bank is worth a try, though a couple of years ago when our branch still had a manager that we knew personally it would have been much easier than it is now. As for trying to second guess currency fluctuations, that seems to me to be an exercise in frustration, at least with my luck! I felt it would be better to borrow (or draw the money) in stages to avoid paying interest until you have to. The problem is the need to get the loan approved before you sign the agreement. In our case, the initial stages would be paid out of our own resources, so it might be 9 months after getting approval for the loan before we needed to draw. I can't predict what exchange rates will be in 9 months time but I do know what 9 months interest payments will be.

[Golfclan]

I'm in Ireland and in the same position.  I have arranged an interest only bridging facility with drawdown in stages.  As has been noted one is taking a punt on capital gain/capital loss in terms of the property that you will sell and also, in your case, the exchange rate.  The only other thing to consider is how easy you will sleep at night when the facility is drawn down and you still have to sell the property.

In addition, I think that your bank will look for a decent margin of cover between the amount of the bridge and the valuation of the U.K. property.