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Summer 2020: interest rates on the rise in France
Interest rates have increased significantly since the end of quarantine. Why is this happening and what does this mean for potential buyers, especially as borrowing conditions tighten?
Interest rates have been slowly increasing since the beginning of the coronavirus epidemic in France. Since quarantine was lifted, however, there has been an accelerated rate of increase, with a 7 point rise compared to the month of April. On average, mortgage rates are at around 1.25%, which although low, is much higher than the 1.12% average recorded in November and the 1.18% average recorded in April.
Why is this happening? First of all, well before the lockdown, the government recommended French banks tighten their borrowing conditions so as to avoid a credit boom, a decision that hasn’t changed since coronavirus hit. Now, after the lockdown, banks have become more cautious for fear of the economic consequences of the crisis.
Usury rates have also been posing problems. The term usury rate refers to the maximum interest rate that banks can grant potential buyers considering application fees, brokerage fees, and insurance costs. This rate is determined by the Bank of France and has never been so low, at 2.40% for loans between 10 to 20 years. With interest rates going up, however, price scissors have resulted. Paris Property Group’s Kathryn Brown says “this usury rate limitation has meant that many buyers over the age of 60 incur life insurance fees as part of their mortgage package that put their would-be total cost over the limits, and result in them being unable to obtain a mortgage under current conditions.” She adds, “clients who are self-employed or have income that varies from month to month are also under added scrutiny, and often denied mortgages as well.”
Pressure on modest-income households
Imagine a modest-income household offered a credit rate of almost 2%. After adding all fees and insurance costs, this rate will quite naturally exceed the usury rate and this potential buyer’s file will be refused. Although usually very rare, this results in a lot of preliminary sales agreements that don’t make it to the next stage of the buying process.
It is thus those who have the least amount of money they can contribute to a down payment that are the most penalized: they are the ones who are either offered higher interest rates (25 points higher than the average) or are denied outright by banks. It’s even more difficult to borrow for those working in tourism, the restaurant industry, or the auto industry, or for craftsmen. First-time buyers are also feeling the sting, and are quoted by Jean-Marc Torrollion, President of FNAIM, as the “first victims” of this phenomenon.
Although brokers have asked the government to exceptionally raise the usury rate to ease pressure, France’s Haut Conseil de stabilité financière (High Council for Financial Stability), decided, during a meeting on June 18th, to keep things as is for the moment.