Usury rate: what risk for the property market?

Since the beginning of the year and the rise in mortgage rates, difficulties have been experienced by a large number of buyers seeking a bank willing to grant them a loan. The quality of the applications is not in question, however, and the requests submitted to banks are as sound as usual.

The culprit would be the usury rate, whose relatively low level in relation to current loan rates would cause one in two applications to be rejected. What is the usury rate and what impact does it have on the completion of property transactions? Should one look to the future and scale down one’s potential property project? Explanations.

What is the usury rate?

The usury rate is a measure to protect the citizen against potential abuses by the banking sector, whose position is dominant when it comes to granting loans. It is the maximum rate at which banks are authorised to lend money – it should be noted that there are different usury rates for the various types of loans.

Banks are therefore prohibited from exceeding the usury rate, calculated quarterly by the Banque de France. The assessment is made based on the annual percentage rate of charge (APRC), which groups together the entire cost of a loan weighing on a household. This includes:

• The nominal rate of the credit,
• The costs related to insurance,
• Various fees (guarantee fees, brokerage fees, application fees, registration fees, etc.).

For a bit of history, the Banque de France calculates the usury rate from the effective average rates applied by credit institutions during the preceding quarter. By increasing this percentage by one-third to arrive at the usury rate, it traditionally offers sufficient margin to satisfy all scales of assessment for credit applications. This is no longer the case at present.

A usury rate incompatible with the current property market context

It is a fact: the amount of loans granted by banks has been decreasing in recent months. While €22 billion was lent in July, the envelope for June amounted to €23 billion, and for May €27 billion.

This decline is explained by the positioning of the usury rate at a level that does not allow banks to meet their legal obligations, when the borrower concerned is not eligible for a sufficiently low borrowing rate. Specifically, the APRC comes up against the insurmountable obstacle of a usury rate that has not adapted quickly enough to the rise in interest rates.

The causes can be seen to be a quarterly adjustment that is slow to respond to a sharp rise in interest rates, as well as a somewhat cautious reaction from the Banque de France given the situation. Since 1st April 2022, the usury rate was thus set at 2.40% for a loan over 20 years. It was mechanically increased to 2.57% on 1st July, as the average credit rate observed for a loan over 20 years between April and June was 1.93%. The Banque de France therefore considered that no exceptional situation justified a particular effort on the usury rate.

Its positioning is nevertheless still insufficient according to property market professionals, to allow more vulnerable applications to succeed with a bank. And in practice, their fears are borne out.

The consequences observed for borrowers

The blockage mainly affects first-time buyers and young households but also seniors. The purchase of the primary residence is concerned in 71% of rejected applications this year, and 51% of refusals related to the usury rate are opposed to borrowers aged 30 to 55.

Overall, the poll commissioned by the French Association of Insurance and Banking Intermediaries (Afib) also tells us that nearly one in two mortgage applications (45%) is refused due to the usury rate. An impressive number of households are thus excluded from property ownership, even though the applications may be described as solid by banking partners.

No collapse in the number of transactions

First and foremost, it is essential to note that the property market is in excellent shape. The number of projects submitted to agencies and even to banks is not waning, quite the opposite. The only difficulty comes from the completion of transactions, due to a significant number of applications blocked by banks even though they are perfectly financeable, given the usury rate.

The mechanism described, while likely to affect the statistical number of transactions recorded by notaries, will ultimately have little consequence if the usury rate is sufficiently increased on 1st October. The Banque de France will then offer all buyers the opportunity to position themselves at the end of the year, which should then set a record for transactions completed. Property market professionals foresee – and call for – the usury rate to be set at 3%, which should allow more vulnerable but normally acceptable applications to be funded.

Instead of a market collapse, the opposite should happen. The renewed dynamism could even influence prices, upwards in the face of suddenly redynamised demand. It should be noted that for now, it is mainly the activity of brokers that is impacted, while banks lend more readily to their direct clients but could ultimately come up against usury as well.

If the Banque de France holds the power to unlock the situation, it will only act in this direction if it considers that the blockage of credit granting is abnormal. This was not the case at the beginning of July.

How to finance a property project more easily?

To conclude, it should be noted that households whose applications are refused still have a card to play to prevent the property of their dreams from slipping through their fingers. By submitting a delinking request to the lender, before the loan offer is issued, they indicate that they are renouncing the insurance offered by the bank – often through a bundled offer – and become free to choose external insurance.

Attention: the contract they intend to take out must present a level of guarantee equivalent to the contract proposed by the lender.

By removing the borrower insurance from the APRC, it will have little chance of reaching the usury rate and the project can be financed.

Being told that one in two applications is refused by the bank can have a negative impact on the morale of a household with a project in mind or in the process of being carried out and whose application is not exemplary. However, the situation is temporary and a positive development should occur on 1st October next. The possibility of circumventing the problem by externalising borrower insurance is also reassuring. The only lasting information, in the end, is that the property market is in good health, and that is all for the best!