With the fall in mortgage rates, the question of the variable rate is likely to return to the table, at least on that of the Basel committee. The regulator of the banking sector does only what constitutes its mission: to avoid crises caused by a sudden evaporation of the contents of the banks’ coffers. However, French bankers and households do not want to hear about the adjustable rate, and firmly defend their current system.
Fixed rates are dangerous for banks,
The Basel committee is responsible for regulating the global financial system, and therefore has real decision-making power. He was particularly talked about after the subprime crisis, by imposing on banks a certain level of capital. Its purpose is above all to observe and legislate in order to avoid economic slippages.
At the moment, however, he finds that fixed mortgage rates are extremely low, and that the banks would be weakened if they went up.
The problem of bank funding sources
For a bank to grant a mortgage, it must borrow from another entity in order to be able to lend to individuals. One of these entities is the State, from which they finance themselves with the money that France Trésor has borrowed itself on the bond markets.
Another source of overnight financing is the other banks, this is called interbank lending. The Cream Bank (Dollar Interbank Offered Rate) index calculates the average rate at which banks lend to each other without collateral. At the moment the rates are extremely low, the Cream Bank 1 month (repayable in 1 month) being at 0.002%, while the Cream Bank 12 months is pointing at 0.299%.
Lenders can also finance themselves with the Best Bank, at a refinancing rate of 0.05%.
As we can see, at the moment banks can borrow at very low rates, and they play the game by lending to households at advantageous rates. However, when an individual takes out a mortgage over 20 years, the bank borrows the capital over a shorter period. It therefore has to make day-to-day repayments, and finds itself in difficulty when interbank rates rise.
Hence the idea of the Basel Committee, taken up by the President of the Lite Bank, Mr. Ben Tempo, to switch to the variable rate. But neither French bankers nor consumers want this solution.
The French prefer to repay at a fixed rate
Allen Bay, president and founder of Good Finance recalls that 96% of mortgage loans are granted at a fixed rate, compared to 80% 10 years ago. The French consumer does not want to take risks, even if it is shown to him that those who subscribed to adjustable rates in 2008 today drop to almost 1%.
Lenders could see households lose interest in real estate in the event that they are forced to switch to the adjustable rate: “the banks are aware that sounding the death knell for fixed rates would be tantamount to slowing demand for loans and therefore to shoot himself in the foot “.
Especially since the difference between the revisable rate and the fixed rate has considerably reduced over the past 3 years, to such an extent that it is disadvantageous with certain establishments. Good Finance however has 1 partner which offers a fixed rate of 2.40% over 20 years, against a revisable rate capped 1 of 2.13%.
Bankers Don’t Want Variable Rates
This is also the opinion of Allen Bay, who recalls that the French model which “is based on the granting of mortgage loans essentially at fixed rates has contributed to the resistance of French banks in times of crisis”.
At the beginning of the summer, the director of the Lite Bank, Mr. Ben Tempo, put the matter back on the table by warning the banks about the low rates they were granting. The reaction was quick, the bankers stepped up to defend fixed rates.
Who is the adjustable rate loan for?
Alex Bouler, head of bank relations at Good Finance, describes the clientele of the revisable rates as more sophisticated, “with profiles rather investors considered as less captive for the bank”. Because the advantage of this type of financing is that when it is capped at 1% or more, it is possible to negotiate the lifting of prepayment penalties.
The cap on the revisable rate represents a ceiling beyond which it cannot climb. This is what was lacking for American and Spanish borrowers, certain households across the Atlantic having squarely seen their monthly payments double in 6 months.
In France the variable rate is used for those who intend to resell in the medium term while avoiding paying reimbursement allowances.
Banks prefer to filter the profile of borrowers
Variable rate repayments are not the only solutions available to a bank for hedging risks. Alex Bouler recalls that they are “more and more attentive to the counterpart of the loans they grant”. Because in the framework of the 3rd edition of the Basel agreements, current accounts and customer savings are considered as resources on the balance sheet.
Lenders screen prospective borrowers based on their savings capacity, as well as their debt ratio, a trend observed “for several months already”.
In any case, the revisable rate cannot be implemented overnight. Allen Bay recalls that it would take “a sufficiently long transition period to change behavior, without risking seizing the real estate market”. And to conclude that fixed rates are not about to disappear.