French mortgage interest rates reach new low
Interest rates have fallen by 38 basis points from the beginning of the year, for the new-build housing market (2.67 % now compared to 3.08 % in December 2013), the existing housing market (2.69 % now and 3.08 % in December) and also the renovation work market (2.73 % and 3.12 % in December). This is the first time since the late 1940s taht mortgage interest rates have reached (and stayed at) such low levels.
The average French mortgage interest rate dropped to 2.70 % in July according to the French National Credit Watchdog “Crédit Logement / CSA”. The existing housing market is barely higher than the new-build housing market (2.70% vs. 2.67%) and the watchdog pointed out that the mortgage market for households is stunningly low. The interest rates are mainly indexed to the Euribor 3 months rate, which at around 0.2 % in July and August, is at an all time low (see the graphs below). In fact, these rates have lead to renegotiations of older mortgages, meaning almost no-margin mortgages for banks, posing a risk for their financial income assets. At the end of July, the governor of the Bank of France, Christian Noyer, declared that the situation is not sustainable, and that French banks should not continue to lend money at such low rates (the lowest in the Eurozone).
As a result of the fall in fixed interest rates, variable rates are even less attractive; they make up no more than 3.1 % of all mortgages so far in 2014, compared to 6.4 % for the same month in 2013. Before the 2010s, variable rates were an attractive option for French households, since fixed rates were higher than 3% or 4 %, but now they are increasingly opting for fixed rates since repayments are lower, making their mortgage repayment scheme easier.
The average mortgage duration also went down, at 204 months this year versus 206 last year. This is related to the difficulties that young or modest households encounter to get funds for their first property purchase these days.
On the other hand, French households still need almost 4 years (3.82 years precisely) to repay mortgage charges (notary charges, insurance charges, interest, etc…). It is a quite long time in France especially with regards to household income, which remains stagnant for the moment.
At first glance, the fall of rates look like good news for buyers, making them all more creditworthy, but on a second thought there are also negative effects. Indeed, even if interest rates are down, it does not necessarily mean that it is easier to become a homeowner in France. Given that the margin on mortgages is shrinking, banks are quite reluctant to offer new mortgages to so-called ‘risky’ modest or first-time buyers.