Usurious interest in practice and its consequences for borrowers

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The slump in the stock markets and their high volatility coupled with galloping inflation could have led the real estate market, a particularly attractive alternative to the stock market in this context, to record highs. In reality, the latter is more or less at half-staff and the question on everyone’s lips is whether the decline will be sustainable and widespread. It must be said that the rise in interest rates and the very tentative rise in the attrition rate have pushed out many individuals whose mortgage applications are being rejected. Learn what the attrition rate is, what it is, and how it is affecting the mortgage market in this article.

What is the wear rate?

The usury rate is the maximum rate at which a bank can lend money. The APR (Global Effective Annual Rate), which corresponds to the total cost of credit, is regulated. There is a limit set by the Banque de France that must not be exceeded, as this offense is punishable by 2 years imprisonment and/or a fine of 300,000 euros.

Each type of loan has its own wear rate (real estate loan, consumption, overdraft facility, etc.). In this article, we focus on the mortgage attrition rate, which is currently having a resounding impact on people with a real estate project.

The attrition rate is the average rates actually granted in the previous quarter plus a one-third margin (note that the mortgage attrition rate will of course vary depending on the term of the loan). This new wear rate is then applied for a quarter. Since July 1, 2022, a new usury rate has applied: It is 2.60% for loans under 10 years and loans with a term between 10 and 20 years, 2.57% for loans over 20 years and 2.99% for bridge loans .

Real estate loans: the scissor effect decoded

At the same time, inflation is encouraging central banks to raise interest rates in order to curb consumption and investment by households and companies and break the price spiral. However, policy rates correspond to the rates at which central banks lend money to banks. Once in negative territory, these rates will rise and should continue to rise in the coming months. Banking institutions naturally pass this increase in borrowing costs onto the loans they extend. Therefore, we see interest rates on mortgages rising.

This rate hike plan poses a real problem for borrowers: on the one hand, mortgage rates are rising rapidly every month; On the other hand, the usury rate increases only slightly, and only quarterly, resulting in a three-month lag, which is particularly disadvantageous for borrowers facing the scissor effect: interest rates on loans continue to increase while attrition rates are kept relatively low. We are currently seeing an increase in refinancing rates, but also an increase in government bond rates of around 2%, ie a return to the level of April 2014 when mortgage rates were around 3.3%, with an attrition rate of 5.19% . Keep in mind that the attrition rate today for loans over 20 years is 2.60%, well below what was practiced when interest rates were comparable.

Turnover rate: The winners and losers of the special context of the summer of 2022

The current level of exorbitant interest rates is hurting both banks and borrowers. In fact, the insufficient increase in the usury rate due to the 3-month lag and the sudden sharp rise in policy rates does not allow banks to offer interest rates that allow them to earn a sufficient margin when mortgage applications are massively rejected. It should also be remembered that banks cannot accept a mortgage file if the monthly payments on it exceed 35% of the borrower(s) income.

Those most affected by these rejections are low-contribution, modest-income first-time buyers (often young people). Least affected by this scissor effect are borrowers with high contributions, comfortable incomes and/or short loan terms (often seniors). According to a recent study by Pretto, 18% of files funded in 2021 would no longer be fundable in the June 2022 market context, representing 220,000 households.