The French High Council for Financial Stability (HCSF) had declared on December 17, 2020 that its December 2019 recommendation to banks on home loan granting criteria would be revised. The regulator's new recommendation has just been published, and confirms the decisions announced.
An adjustment to the December 2019 recommendation
In December 2019, the HCSF issued a recommendation aimed at further restricting the granting of mortgages by banks. The maximum effort rate was to be 33%, and the maximum loan term could no longer exceed 25 years.
In December 2020, the regulator had opted for a relaxation of these prerequisites. The recommendation published on January 27, 2021 confirms these announcements.
The main changes include an increase in the maximum loan-to-value ratio from 33% to 35%, and a maximum loan term of 27 years, with up to 2 years' deferred repayment in the event of works delaying entry into the home.
Finally, as announced, banks now have a20% margin of flexibility, compared with 15% at the end of the December 2019 recommendation. In other words, banks have the right to grant mortgages that deviate from the aforementioned criteria, up to a limit of 20% of the total volume of new loans.
Clarification of the effort rate and flexibility margin
The HCSF recommendation is accompanied by a leaflet providing further details.
As a result, the effort ratio, which can now reach 35%, includes loan insurance. As the notice states, the annual cost of borrowing "includes repayment of the capital borrowed and all interest and insurance charges". However, the amount of this insurance sometimes represents more than half of the monthly payments, which modifies the calculation of the effort ratio.
Furthermore, banks may only use the 20% flexibility margin in accordance with specific criteria. " At least 80% of the maximum flexibility will be reserved for buyers of their principal residence [...] and at least 30% of the maximum flexibility will be reserved for first-time buyers," states the notice accompanying the HCSF's recommendation.
Economy and Finance Minister Bruno Le Maire, who chairs the HCSF, insisted in December 2020 on the importance of not depriving first-time buyers of access to home ownership, which is what the December 2019 recommendations have partly led to.
The HCSF also specifies that while "renegotiations, buybacks and consolidation of loans do not fall within the scope of the recommendation", banks are nonetheless invited to "take into consideration the recommended good practices and ensure that these operations enable a reduction in the effort ratio".