5. Types of Mortgage Loans in France
- Capital Repayment or Interest Only?
- Fixed or Variable Rate Mortgage?
- Bridging Finance
- Hybrid Mortgage
5.2. Fixed or Variable Rate Mortgage?
A major consideration in the selection of a mortgage is whether to opt for the security, but higher rate, of a fixed rate mortgage, or to take a chance on possibly paying less with a variable rate mortgage.
Clearly, if you are looking for security and guaranteed repayments, then a fixed rate mortgage has to be the choice. However, it is often the case that a redemption charge is payable on the early repayment of a fixed rate mortgage.
In France, most mortgages are granted on a fixed interest basis.
If you want to get some idea of how much you might be able to borrow, and to compare the level of repayment using different fixed or variable rates, you can do so visiting Repayment Calculator.
One fixed rate mortgage that may be of interest to many is the prêt modulable, or flexible mortgage.
Under the terms of this mortgage you can vary the amount of your repayments according to your circumstances.
In general, there are upper and lower limits of repayment, but in some cases you can suspend the payment or your mortgage for up to two years, or increase repayments by as much as 30%.
You can find out up to the minute latest rates, excluding insurance, at Current Mortgage Interest Rates.
Despite the popularity of fixed rate mortgages, the market for variable rate mortgages in France has increased significantly in recent years, and now accounts for a third of all mortgages granted.
Many are attracted by the lower initial rate offered by a variable rate mortgage and a number of new schemes introduced by the lenders can limit the liability of the borrower and offer greater security and certainty.
Variable rates are normally based on the Euribor three-month rate or the Euribor one-year rates, with a margin of 1% to 3% to the lender, depending on the nature of loan and the characteristics of the borrower.
If you take out a variable mortgage make sure you are clear on how frequently the rate is revised as this can clearly make a difference to how much you will pay each year.
There are many different types of variable rate mortgages.
The most common is, called prêt à taux révisable cape.
It will have a variable rate that is capped up to 2% or 3%.
This has some of the security of the fixed rate mortgage, combined with the savings that may be achieved with a variable mortgage.
Conversely, any decrease in the variable rate may also be limited.
A modified form of this mortgage is called the prêt à taux révisable non cape mais à échéances plafonnées!
In this type of mortgage the rate is completely variable, but the amount of the monthly payment has an upper limit.
Where the increase in the rate cannot be contained within this limit, the term of the mortgage is increased, thereby reducing the monthly payment.
Where rates go down the term of mortgage is reduced.
The consumer price index is normally used to revise monthly payments within the upper limit.
There are also standard variable mortgage called le prêt à taux révisable non cape et à échéances non plafonnées.
Quite simply, the rate and duration of the loan are completely variable without limitation.
If you choose to use this product then it pays to consider whether or not the lender would allow you to later convert to a different type of mortgage and any costs that might be applicable.
You should also be able to find mixed fixed and variable rate mortgages on offer.
Some lenders offer the possibility of conversion to fixed rate, but it is important to be clear on terms of this offer, and particularly whether or not a fee is payable.
With growing competition in the French mortgage market many lenders now offer a discounted mortgage for a limited duration.
The level of the discount can be as much as 1%.
However, beware of the duration of the discount period, the rate at the end of the discount period, and of redemption charges if you wish to change your lender.
Annual Percentage Rate
The real rate of interest on your loan is measured by the Taux Annuel Effectif Global (TAEG), which includes the lenders fees and associated costs with the loan, e.g. administration costs, insurance.
The TAEG is highly regulated and offers a strong degree of protection to consumers against lenders who may seek to misrepresent the true rate of interest on the loan.
Perhaps of equal importance it also offers lenders the opportunity to make genuine comparisons on the rates offered by different lenders.
The use of the TAEG is mandatory in all advertising by lenders. In turn the TAEG cannot exceed the ursury rate (taux d’usure) set by the Banque de France.
With a low ursury rate that has applied in recent years, this has created problems for banks who have been unable to offer even low interest mortgage to otherwise acceptable applicants.
This has particularly the case for those seeking a smaller mortgage, due to the admin charges that apply, and which can then push up the TAEG. The same applies to older applicants or those with a medicial condition, where the mortgage protection insurance required for the mortgage will be higher, thus increasing the TAEG.
Where the rate is fixed then the TAEG is easily determined.
However, where rate is variable then the advertised rate is only that for the first period of the loan, whether that is the first quarter or first year, depending on duration of the fixed period.
Where the rate is variable then the law requires that the modalities and frequency of change are made clear in written offer.
Where the loan has no legal, administration or insurance costs then the TAEG can only be the nominal rate of interest.
Whilst the TAEG is clearly useful in comparing offers it is important that you look beyond the rate of interest.
Thus, look at the actual cash payment schedule over the term of the mortgage, the penalty clauses, the flexibility of the lender in terms of changes in the type of mortgage, and the modalities of the insurance premium, whether constant or reducing.
Most importantly, consider wider market trends in the type of mortgage you are proposing to take out.
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