Mortgage loan: beware of the rate of wear in the event of a stronger rise in rates!

In December, some banks raised their credit rates as others had already done in November, but to a limited extent. In addition, we are again witnessing some rate cuts, but moderate.  In this context, the rate differentials according to profiles are widening and the level of usury rates is becoming more and more problematic for certain categories of borrowers.

If a rise in rates is confirmed in 2019, more and more potential buyers could be refused their credit, as is already the case sometimes for the most risky and senior citizens for whom the rate of insurance has too great an impact on the annual percentage rate (APR).

Some limited rate increases in December: from 0.05% to 0.10%

Some limited rate increases in December: from 0.05% to 0.10%

In December, in line with the month of November, we are again witnessing some rate hikes but limited, from 0.02 to 0.10% depending on the banks and the loan periods. Other banks are still applying rate cuts, in the same proportions, in order to start 2019 with attractive conditions and thus capture market shares from the start of the year. “By posting different rate hikes according to borrower profiles and loan durations, the banks are targeting their preferential customers.

In the same way, some are lowering their rates for young people only, with a desire to attract first-time buyers, preferably with an evolving profile. To date, Cream Bank competition remaining very strong, these rate increases posted have almost no impact for borrowers who have a good profile” explains Alex Bruner, spokesperson for Good Finance.

Thus overall, the declines compensating for the increases, the average rate remains stable at 1.30% over 15 years, 1.50% over 20 years and 1.70% over 25 years. The floor rates are still very low at 0.80% over 15 years, 0.95% over 20 years and 1.30% over 25 years for the best profiles.

Increasingly problematic wear rate

Increasingly problematic wear rate

The problem of the usury rate is increasingly present, with the risk of excluding certain categories from the market in the event of a rise in credit rates. In order to protect borrowers and to prohibit the granting of loans on “non-market” conditions, there is a “rate of usury” above which it is prohibited for an establishment to lend under penalty of being prosecuted court.

If the principle of a ceiling rate is theoretically favorable to the consumer, in the current context of very low nominal rates, with a risk of rise in the short or medium term, its calculation is now a problem. This rate not to be exceeded is calculated by the Banque de France from the average of the interest rates actually charged by lending institutions during the previous quarter, increased by a third.

Thus, in recent years, and especially for 2 years, under the effect of the overall fall in mortgage rates, the rate of wear has continued to decrease, passing for mortgage loans with a duration of 10 years. at less than 20 years from 3.35% at the start of 2017 to 2.85% currently – a drop of 0.50% – and from 3.37% to 3.08% for mortgage loans of 20 years or more, i.e. a fall of 0.30% when meanwhile nominal average credit rates remained almost stable (going from 1.55% at the start of 2017 to 1.50% currently).

Two problems arise. First, the usury rates fell more sharply than the average rates, which remained stable, masking large differences in rates depending on the profiles. The usury threshold thus has a greater impact on the most “risky” profiles: those with the lowest incomes and who obtain higher rates. In some banks, according to the profiles, the rates over 20 years range from 1.3% at 2.30% or an APR which can greatly exceed 3.08% by including all costs or in the event of premium insurance.

Furthermore, if the margin of a third added to the effective rates is precisely intended not to penalize the riskiest borrowers, this rule does not take into account the different borrower profiles and in particular the riskiest in terms of health (senior, aggravated risks) whose rates frequently exceed the usury threshold. Added to this is also the fact that the end of the tax exemption on the death guarantee of borrower insurance contracts will increase the cost, impacting – admittedly only slightly – again the APR.

Significant consequences

Significant consequences

The current level of usury rate therefore has important consequences such as the exclusion of certain borrowers, especially the most risky, who see their credit refused. This can in particular be the case during a purchase-resale credit where the rates are higher and for which the sum insured is high pending partial reimbursement at the time of resale, which weighs the APR.

Other consequences: the need for certain senior borrowers to buy without insurance (when possible) so as not to exceed the rate of usury, the drop in brokerage fees not to weigh on the APR and the obligation for banks limit rate increases and choose instead to increase the application fees for example or account maintenance fees which also penalizes borrowers…

What perverse effects?

What perverse effects?

“For now, strong Cream Bank competition and low usury thresholds limit the rise in credit rates but in the event of tensions over refinancing rates or government borrowing rates, banks could be forced to pass on these increases on their rate grids. A rise which would be taken into account with a 3-month lag in the calculation of the wear rate, thus generating an unfavorable scissor effect for many borrowers who would mechanically exceed this rate it is one of the factors that could penalize the real estate market in 2019 ” concludes Jay Fox, Managing Director of Good Finance.

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