Mortgages: strict conditions for lending

Until now, the new rules governing the granting of mortgages have not been mandatory: they were recommendations made to banks by the financial authorities. As of January 1, 2022, as planned by the French Financial Stability Board, these recommendations will become legally binding rules.

Award recommendations transformed into binding rules

At the end of 2019, the French High Council for Financial Stability (HCSF) issued its first recommendation to banks concerning mortgages, tightening lending conditions. A year later, these conditions were eased, to reduce the risk of default and overindebtedness without restricting access to home ownership to a minority of applicants.

From January 1, 2022, as planned by the HCSF, these recommendations concerning the granting of residential mortgages in France will become rules that banks will be obliged to respect. Households' borrowing costs, including insurance, will be capped at 35%. Borrowers' rental income, if any, will not be taken into account in the calculation, as the reliability of these resources is considered insufficient.

The term of the mortgage must not exceed 25 years, or a maximum of 27 years in the case of a VEFA (Vente en l'état futur d'achèvement) purchase, or an older property requiring work representing at least 25% of the transaction price.

Banks will be able to waive these rules for 20% of applications. A minimum of 30% of these exceptions will be for first-time buyers, and 80% will be for mortgages to buy a primary residence.

Banks will be subject to controls by the Autorité de contrôle prudentiel et de résolution (ACPR), and will be liable to financial penalties or reprimands for non-compliance.

The risk of non-payment is already very low in France

Most banks were already complying with the HCSF's recommendations, as demonstrated by the drop in the percentage of mortgages granted despite non-compliance.

For example, loans with terms of over 25 years, or those granted despite an effort ratio in excess of 35%, have fallen considerably, from 48.3% to 20.9%, a figure barely exceeding the 20% margin granted by the HCSF to banking institutions.

Despite this compliance with the recommendations, the HCSF intends to eliminate any possibility of unfair competition between banks by making the new mortgage conditions legally binding.

A number of specific French features already considerably limit the risk of non-payment. Firstly, unlike in Spain, French households do not take out variable-rate mortgages, but fixed-rate mortgages in 99.4% of cases in 2020. This means that if interest rates rise during the loan repayment period, the banks bear the consequences.

Borrowers and banks are protected by borrower's insurance, which is compulsory in France, and the amount of the mortgage granted does not depend on the value of the property, but on household income, unlike in the United States.

Last but not least, Crédit Logement, the specialist mortgage guarantor, guarantees around 60% of home loans in France, considerably reducing the risk of non-payment, just like mortgages.

According to the HCSF, these new lending rules do not adversely affect the most disadvantaged profiles: households with annual resources of less than €20,000 account for 10% of loans granted, a share that has remained stable over the past two years.