Real estate: borrowing over 25 years is no longer enough to offset the rise in prices in 2022

Times are tough for property developers. With the constant rise in prices and the rise in interest rates, they have to borrow over longer and longer periods, without, however, exceeding the regulatory limit of 25 years. However, the approach remains very difficult in the face of the low rate of wear and the requirement of personal contribution.

Sharp rise in house prices

The price increase remains supported in theold real estateregistering an increase of 2.9% between May and July 2022, also +2.9% over one year (LPI-SeLoger August 2022 barometer). Those are the houses which show the most marked increase with an evolution of +3.5% over three months, but a decline of 0.1% over one year. Apartment prices increased by 2.5% over three months and soared by 5.2% over one year.

The rise in prices in the old continues in 91% of cities with more than 50,000 inhabitantswith an annual growth rate of at least 5% in 59% of large or medium-sized cities and more than 10% for 22% of municipalitiesall located in the provinces.

In the new, the rise in prices strengthens more strongly with a three-month increase of 4.6% for houses and of 2.8% for apartments. This price trend is due to that of construction costs attributable to soaring inflation. It has the effect of discouraging many potential buyers already hampered by the granting rules and the constraint of mobilization of personal contribution.

Ever higher interest rates

Applicants for a mortgage also have to deal with the sharp rise in interest rates since March 2022. According to the Crédit Logement Observatory, the average rate for all durations combined was 1.82% in August (except home loan insurance cost and cost of collateral), compared to 1.70% in July, 1.52% in June and 1.19% in March.

The increase in values ​​was accentuated during the summer in connection with the first increase in the key rates of the ECB (European Central Bank) at the end of July. The new increase from September 8, 2022 will continue to raise the cost of money and penalize borrowing households. It is now almost impossible to get into debt below the 2% mark.

Although all borrowers benefit from loans at rate far below inflation (5.8% over one year in August), access to mortgages is becoming more and more complicated. Banks are limited in their room for maneuver by regulations onwearthey cannot raise borrowing rates in line with monetary developments, but the difference between the gross rate and the usury rate is insufficient to take out an APR below the maximum legal rate.

Access to credit hampered by usury

For the record, the wear rates, which are the maximum rate beyond which banks cannot lend, apply to APR (Global Effective Annual Rate) and not at the gross rates displayed by credit institutions and brokers. To the interests are added all the other costs related to obtaining financingadministration fees, guarantee andborrower insurance which represents on average 30% of the overall cost of a home loan.

The wear rate 2022 are at the heart of a lively controversy between brokers and the Banque de France. Because of a unsuitable calculation method At the current sharp rise in interest rates, the usury threshold is a blocking factor: according to brokers, 45% of financing requests fail because of APR higher than usury.

The publication of new attrition rates for the last quarter of 2022 is eagerly awaited and should indicate a rise in the legal thresholds… which could turn out to be even too thin to expand access to credit if borrowing rates continue to rise.

Repayment period limited to 25 years

Another obstacle to the mortgage: the granting rules imposed by the High Council for Financial Stability. Barring exceptions, banks may not grant loans of a repayment period greater than 25 years. Extending the term of the loan, however, makes it possible to reduce monthly payments and lower the debt ratioin return for a higher interest rate.

Still according to the Crédit Logement Observatory, in August 2022, the average duration of loans was at its highest level, at 243 monthsi.e. 20 years and 3 months, against 238 months last April. Facing thecontinuous increase in real estate prices and to that of the rates ofpersonal contribution required, borrowers have no choice but to get into debt over longer and longer periods of timebut this lengthening is no longer sufficient and less and less effective as interest rates rise.

The only good news in September concerns households who already have a mortgage. Thanks to the Lemoine lawany borrower can change mortgage insurance at any time and free of charge, without waiting for the due date. A now simplified approach that allowssave hundreds or even thousands of dollars over the remaining term of a home loan.

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