Decline in the wear rate: what consequence for my mortgage application?

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(Photo credits: Pixabay - VisionPics)

(Photo credits: Pixabay – VisionPics)

Often unknown to the general public, the wear rate is nevertheless a key element in the acceptance or refusal of a mortgage application file as well as a safeguard put in place by the authorities to protect borrowers. It was lowered to 2.40% on April 1. Good news… or not necessarily?

The wear rate, what is it?

The usury rate – or usury rate – refers to the maximum Annual Effective Rate (APR) at which a loan can be granted by a financial institution.
For a home loan, the Annual Effective Rate (APR) is made up of all credit-related costs such as:

  • The base interest rate
  • Administrative fees due to the bank
  • Fees due to intermediaries, such as a broker for example
  • The cost of creditor insurance (ADE)
  • The cost of property valuation paid to a real estate agent
  • Guarantee fees (mortgage or bond)
  • Any fees imposed for obtaining credit, such as account maintenance fees if you have to open a bank account with the lending institution.

At the end of each quarter, the Banque de France sets the usury rate for the following quarter, which must not be exceeded, otherwise the loan may be considered “usurious”. Lending money at usurious rates is an offence, which is punishable by two years in prison and a fine of 300,000 euros according to article L341-50 of the Consumer Code.

How is the wear rate calculated?

The Banque de France has established a number of loan categories and calculates for each a specific usury rate, which also varies according to the duration of the loan.

Five categories have been defined:

  • Fixed rate loan with a term of less than 10 years
  • Fixed rate 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)

Regarding the wear rate 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 fixed at the end of each quarter for the following quarter, and published in the Official Journal.

For example, for a fixed-rate home loan with a term of 20 years or more, 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, this same attrition rate was set at 2.40%, i.e. a further decrease of 0.01% compared to the previous quarter, but a decline of 0.20% compared to 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 loan, no financial institution can legally validate a mortgage application file whose APR would exceed the usurious rate of 2.40%.

A safety net for the borrower

By thus setting a legal wear rate not to be exceeded, reassessed each quarter for the following quarter, the Banque de France plays a role in regulating the economy but also in protecting the consumer, by setting protective limits against excessive rates that could be offered to him without this ceiling. The objective is clear: to prevent borrowers from subsequently finding themselves in a delicate financial situation.

However, a “scissors” effect can sometimes form due to the discrepancy between usury rates – based on borrowing rates practiced the previous quarter – and credit rates – reassessed almost in real time by financial institutions in depending on fluctuations in the financial markets.

Thus, in the first quarter of 2022, the wear rates, based on the figures for the last quarter of 2021, fell, while credit rates rose again, mechanically reducing the number of files from borrowers eligible for mortgages. This discrepancy should last a few more months and then gradually settle down.

Stephanne Coignard (redaction@boursorama.fr)

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