Since the beginning of the year, interest rates on mortgages have been on the rise again, after reaching historically low levels. Accustomed to attracting customers with very attractive rates, banks are now having to rethink their sales pitches.
The impact of France's rising borrowing rates
The main reason for the gradual rise in interest rates on mortgages is the increase in interest rates on French government bonds, known as OAT 10 ans (Obligations Assimilables du Trésor).
These loans are used to finance the country's needs, and also enable banks to refinance themselves by selling these debt securities to investors. Since December 2021, French government borrowing rates have been rising, after 3 years of near-zero or even negative rates.
At the beginning of May, OATs reached 1.49%, a rise that banks are passing on to their customers in order to maintain their margins. The U.S. Federal Reserve (Fed) is behind the increase: it raised rates for the first time in March 2022, after not raising them since 2018, and then raised them again by 0.5 percentage points in early May.
And yet, while France's rising borrowing rates are the most direct cause of higher interest rates on mortgages, banks are well aware that this is not the most relevant argument for convincing their customers.
Banks make inflation part of their sales pitch
On the other hand, the return of inflation allows banks to use a far more persuasive argument. While rates continue to rise, averaging 1.27% in April compared with 1.06% last December, they are actually negative in real terms.
In concrete terms, by calculating the difference between the nominal rate and the inflation rate, the rates are lower than 0. According to this method of calculation, the average real borrowing rate is no higher than 1%, but stands at around -3%, taking into account the 4.5% rise in consumer prices in March, over a sliding 12-month period.
Banks are trying to teach their customers to differentiate between nominal and real rates, which have long been very close. They use this argument to convince them that, despite rising interest rates, mortgages remain attractive.
What's more, according to the banks, inflation will enable borrowers to make a repayment effort that decreases over time: their income will increase in proportion to the rise in inflation, while the interest rate on their loan will remain fixed.
However, salary increases are far from automatic, and are not always proportional to inflation, which contradicts this argument.
However, the banks still have one last argument: depositing savings in a current account or passbook in this inflationary environment is tantamount to making a negative-rate investment, given the low rates of return.
However, these savings could be better used, according to the banks, as a down payment for investing in property. However, putting your savings in a passbook account gives you easy access to them in times of hardship, which can be even more useful when prices are on the rise.