Decrease in wear and tear: what consequences for my mortgage application?

(Photo credits: Pixabay - VisionPics)

(Photo credits: Pixabay – VisionPics)

The wear rate, often unknown to the general public, is nevertheless a key element in the acceptance or refusal of a mortgage application file, as well as a guarantee introduced by the authorities to protect borrowers. On April 1, it was lowered to 2.40%. Good news…or not necessarily?

The wear rate, what is it?

The degree of wear – or usury – refers to the maximum annual effective interest rate (APR) at which a loan can be provided by a financial institution.
For a home loan, the annual effective interest rate (APR) consists of all credit-related costs, such as:

  • The basic interest rate
  • Administration costs owed to the bank
  • Fees to intermediaries, such as a broker for example
  • The costs of creditor insurance (ADE)
  • The cost of real estate valuation paid to a real estate agent
  • Guarantee costs (mortgage or bond)
  • Any costs for obtaining credit, such as costs for maintaining an account if you need to open a bank account with the lending institution.

At the end of each quarter, the Banque de France sets the usurious interest rate for the following quarter, which must not be exceeded, otherwise the loan may be considered “Usury”. Borrowing money at usurious interest is an offense that, according to Article L341-50 of the Consumer Act, can be punished with two years in prison and a fine of 300,000 euros.

How is the wear calculated?

The Banque de France has defined a number of credit categories and charges a specific usury rate for each, which also varies according to the term of the loan.

Five categories are defined:

  • Fixed rate loan with a term of less than 10 years
  • Fixed-interest loan with a term between 10 years and less than 20 years
  • Fixed rate loan with a term of 20 years or more
  • Variable rate loan (in this case the duration is not taken into account)
  • bridging loan (in this case the duration is not taken into account)

As for the wear and tear of a mortgage, the Banque de France lists the average rates charged by financial institutions and increases them by a third. The wear rate is determined at the end of each quarter for the following quarter and published in the Official Journal.

For example, for a fixed-interest home loan with a term of 20 years or longer, the average effective rate charged in the fourth quarter of 2021 was 1.81%. It therefore rose mechanically to 2.41% on January 1 for the first quarter of 2022.

As of April 1, 2022 and for the coming quarter, the same trend was set at 2.40%, a further decrease of 0.01% compared to the previous quarter, but a decrease of 0.20% compared to the previous year (2 .60% in the second quarter of 2021).
Therefore, for the period from April to June and for this category of loans, no financial institution can legally validate an application file for a mortgage whose APR would exceed the usurious rate of 2.40%.

A safety net for the borrower

By thus setting a statutory wear rate that must not be exceeded, which is reassessed every quarter for the following quarter, the Banque de France plays a role in regulating the economy, but also in protecting consumers, by protecting set limits at excessive rates that could be offered to it without this cap. The goal is clear: to prevent borrowers from ending up in a delicate financial situation afterwards.

Sometimes, however, a “scissors effect” can arise due to the mismatch between usury rates — based on borrowing rates used in the previous quarter — and credit rates — which were reassessed in near real time by financial institutions, depending on fluctuations in the stock market. financial markets.

For example, in the first quarter of 2022, wear and tear rates, based on the figures from the last quarter of 2021, fell, while credit rates rose again, mechanically reducing the number of borrowers’ records that were eligible for mortgages. This discrepancy should last for a few more months and then gradually decrease.

Stephanne Coignard ([email protected])