Evolution of the Property Market: Portability of Loans in Question

In this inflationary period encouraging prudence and given the tightening of lending conditions, the property market is entering a phase of uncertainty. Theories are circulating about a possible reduction in demand which does appear to be beginning, which would be accompanied by a fall in prices to be confirmed.

In search of solutions to revitalise the market, property industry players represented by FNAIM (the national federation of property professionals) have proposed to Olivier Klein, MinisterDelegate for Housing, that a mortgage portability system be implemented. Let us revisit this principle and analyse the impact it could have should the government give its approval.

What does mortgage portability involve?

In simple terms, the system allows the acquisition of a new property whilst retaining the mortgage already being repaid. A borrower who, for example, took out a 20-year loan at a rate of 1% four years ago can simply ‘change address’ without any modification to the conditions applicable to their credit agreement.

Not taking out a new loan eliminates the risk of having one’s application refused and greatly facilitates the property purchase process. Furthermore, it preserves the same rate conditions and avoids paying early repayment fees on the existing loan.

It should be noted that this credit transfer system already exists. However, banks are reluctant to use it and simply do not offer it, for reasons we shall discuss below.

Specific conditions currently exist regarding mortgage portability:

• The purpose of the property must be respected: a principal residence must be replaced by another principal residence;
• The value of the new property acquired must be at least equal to the outstanding capital on the loan at the date of acquisition;
• Any complementary loan required must be requested from the same banking institution and granted within six months of the transfer;
• No repayment default must have occurred during the elapsed repayment period of the existing loan;
• The mortgage transfer clause must be indicated in the initial offer;
• The loan guarantor and insurance must authorise the transfer.

It should be added that portability could quite easily be attached to the property: a selling owner with no new loan to take out for a purchase would thus transfer their loan to the buyer. Once again, the guarantor’s approval would simplify the process.

The uphill battle for mortgage borrowers

To more clearly explain why FNAIM is proposing to introduce portability, it must be understood that the difficulties in obtaining loans, which have been a reality for several months, are seriously compromising numerous property projects. Aside from hindering a high number of transactions, this raises questions about the market’s future and a possible collapse of demand thus paralysed.

In concrete terms, the difficulty faced by borrowing households is explained as follows:

• Banks require a stronger financial position than before;
• The rise in mortgage rates simultaneously penalises the quality of applications;
• The usury rate, set at 3.05% since early October, will not be reviewed until the new year and struggles to permit the granting of many loans given the continued rise in interest rates;
• Inflation exceeding 6% year-on-year in our economy further hardens banks’ prudence, fearing that somewhat ‘tight’ applications may default.

The consequences of these facts are empirically observed in the property market: newbuild sales are stagnating at a historically low level and in the secondhand market, demand is weakening. Potential buyers are on one hand becoming aware that purchasing a new property could be difficult, and on the other hand adopting a wait-and-see attitude given economic uncertainty and reluctance to sell their currently owned property.

Add to this the renovation obligation for rental properties imposed by law. From 2025, those rated G on the EPC will be prohibited from rental, but from 1st January 2023, the withdrawal from rental of dwellings consuming more than 450 kWh per square metre per year is further penalising the market. Banks, reluctant to grant renovation loans to owners already in debt for acquisition, are placing the same threat on the rental market as on the transaction market.

Logically positive impact on property demand

Let us return to our mortgage portability system, which could solve a good part of the difficulties cited and thus revive a property market whose demand should be driven by buyers’ proven motivation.

Credit transfer held little interest in recent decades, synonymous with continuous falls in interest rates. Taking out a new loan then left a chance of always paying less for one’s credit. The reversal of the trend logically raises the question.

Introducing a legal possibility to use mortgage portability instead of leaving its implementation to banks’ discretion would certainly change the picture: as most existing credits are being repaid without default by households who secured very advantageous terms, portability would enable the easy realisation of numerous projects currently hampered or shelved due to a dossier not sufficiently qualitative enough for banks’ current requirements.

Banks, the only ones put off by the idea

Revitalising the property market and satisfying households’ desires, thereby participating in the country’s economic dynamic by generating related renovation projects: mortgage portability is an idea everyone applauds! Or almost.

Banks instead see it as a way of circumventing the evolution of their policy and, above all, a clear brake on their profitability. Indeed, if the system is adopted, they will no longer be able to lend at today’s conditions, which yield them much more. At the same time, they will no longer receive such high application and insurance fees. Finally, banking establishments will be forced to comply with new procedures and therefore fund an adjustment of practices or even genuine training.

Minister Olivier Klein has stated that mortgage portability is an option he is considering carefully to revitalise the property economy. This spotlight, in the context we are experiencing, could lead the government to require banking establishments to offer it more actively or, for a rapid effect, to remove the obligation for the clause appearing in loan offers. Watch this space!