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The decline in stock markets and their extreme volatility coupled with accelerating inflation could have brought the real estate market to a peak, which is a particularly attractive alternative to the stock market in this context. In fact, the latter is in the middle of the road and the question on everyone’s lips is whether the decline will be permanent and pervasive. It must be said that rising prime interest rates and a timid increase in the wear rate have driven a large number of individuals out of the market who reject their mortgage application. Find out in this article what the rate of erosion is, its level, and its consequences for the mortgage market.
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 actually regulated. There is a maximum set by the Bank of France that you must not exceed because this offense is punishable by two years imprisonment and/or a fine of 300,000 euros.
Each type of loan has a separate wear rate (mortgage loan, amortization, overdraft, etc.). In this article, we will focus on the mortgage erosion rate, which is currently having a resounding effect on individuals who have a real estate project.
The erosion rate corresponds to the average rates actually granted during the previous quarter, plus a margin of one-third (note that the erosion rate for a mortgage varies significantly according to the term of the loan). This new wear rate is then applied for a quarter of a year. Since July 1, 2022, a new usury rate has come into effect: it is up to 2.60% for loans of less than 10 years and loans with a term of 10-20 years, to 2, 57% for loans over 20 years, and 2.99% for the bridge . loans.
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Mortgage Credit: Decoding the Scissors Effect
At the same time, inflation encourages central banks to raise their key rates to reduce consumption and investment by households and businesses in order to break the spiral of rising prices. However, the key rates correspond to the rates at which central banks lend money to banks. Once in negative territory, these rates are on the rise and should continue to rise in the coming months. Banking institutions naturally pass on this increase in the cost of the loan to the loans they make. Thus, we are seeing an increase in interest rates on mortgages.
This timetable for raising interest rates poses a real problem for borrowers: on the one hand, mortgage rates are rising rapidly every month; On the other hand, the rise in the rate of usury increases slightly and only every three months, resulting in a lag of three months that is particularly detrimental to borrowers who face the clipper effect: loan interest rates go up and higher when eroding rates are maintained. relatively low. We are currently seeing an increase in refinancing rates but also an increase in government borrowing rates, about 2%, a return to their level in April 2014, when mortgage rates were around 3.3%, with an erosion rate of 5.19%. Remember that for loans over 20 years, the erosion rate is 2.60%, which is much lower than what was practiced at the time when the prime rates were comparable.
Attrition rate: winners and losers in the context of summer 2022
The current level of usury rates is detrimental to banks and borrowers. Indeed, an insufficient increase in the usury rate, due to a 3-month lag and a sudden sharp increase in key interest rates, does not allow banks to offer rates that would allow them to generate sufficient margin, as mortgage applications are massively rejected. It should also be remembered that banks cannot accept a mortgage file if the monthly payments to it exceed 35% of the borrower(s) income.
The profiles most affected by this disapproval are first-time buyers with a low contribution and modest income (mostly young people). Borrowers with a strong contribution, comfortable income and/or short credit period (mostly the elderly) are least affected by this scissors effect. According to a recent study by Britto, 18% of files funded in 2021 will not be bankable in the context of the market in June 2022, which represents 220,000 households.