Once again bankers are faced with a headache, this time dictating how much they can charge in terms of mortgage rates. Ever since the European Mortgage Directive came into force a few years ago, French mortgage lenders have been battling between French and European law with the EMD providing strict guidelines on what they must include in the APRC (annual percentage rate of charge) and yet no move from the French side which sets a maximum rate that the APRC mustn’t go above, called the taux d’usure in French (usury rate in English).
Originally put in place in the mid seventies as a way of controlling mortgage lenders interest rates and ensuring that they didn’t practice abusive rates, the Usury Rate has existed and evolved over the years, each time adapting to market trends and thus continuing to prevent banks from charging excessive interest rates on money lent. After the subprime crisis, more reforms were introduced to avoid high interest rate mortgages and a ceiling rate was given to different categories of loans and different durations, differentiating between consumer loans and mortgages under 10 years, between 10 – 20 years and over 20 years.
Until recently the Usury rate has been of little concern, many people even in France had never heard of it.It is published quarterly by the Banque de France and rarely were borrowers affected by it.
Now, with the EMD, low interest rate and a Usury Rate which hasn’t been adapted to meet the new criteria and you get chaos. Lenders must ensure that their APRC (or TAEG in French) does not go over the usury rate and if it does they cannot legally lend meaning banks are having to turn down perfectly acceptable mortgage applications due to the usury rate, yet mortgage rates at 1 – 2% can hardly be considered abusive!
The APRC is very clear on what it must include and includes numerous items that are independent of the lenders control. Items included are the nominal rate of interest for the mortgage, the cost of the monthly life insurance, the lenders arrangement fees, the brokers fees, the mortgage registration tax which is the cost of registering the mortgage guarantee, the monthly cost of running a basic bank account for the mortgage to be debited from…
The cost associated for each of these items is added to the global cost of the mortgage and then calculated backwards to give a %, thus giving the APRC (TAEG). This is a great way of comparing mortgages but it doesn’t paint a true picture unless you are comparing like for like (i.e. apples with apples and not apples with pears).
Since its implementation, mortgage lenders have been struggling with certain categories of clients and have seen mortgages refused due to the APRC (TAEG) going over the Usury Rate. Generally affected are people requiring small mortgages as the fixed costs of the mortgage registration tax and fees represent a much higher percentage of the mortgage so that pushes up the APRC. Also affected are people with illnesses or pre-existing medical conditions, or older borrowers as the cost of their mortgage insurance is more expensive than a fit and healthy 30 year old say. The higher insurance cost also pushes up the APRC often above the Usury Rate. Not insuring a borrower is deemed as irresponsible in France so just ignoring the insurance aspect to stay within the Usury Rate isn’t possible and the banks would prefer not to lend.
In recent months we have people come to us, including French clients, as they have been refused by banks because the rate was too high yet not really understanding why.
At the time of writing, March 2021, the Usury Rate for the TAEG for a 20 year fixed rate mortgage is 2.67%, a 10 year fixed rate is 2.57% (source: https://www.banque-france.fr/statistiques/taux-et-cours/taux-dusure)