For 15 months now, the rise in mortgage rates has been continuous and brutal. Still close to 1% at the start of 2022, rates have tripled to more than 3% over 20 years today and around 3.30% over 25 years, all this following the sharp rise in bond rates (10-year OATs) which are changing now above 3.20%, an 11-year high.
In the background, there is of course inflation, which directly influences monetary policies, which have no other solution than to raise their key rates. The ECB will therefore increase its rates again on March 16, which should bring the rate for the main refinancing operations to 3.5%.
The obstacle of the debt ratio of 35%
Faced with real estate prices which have risen sharply in recent years and which are barely beginning to level off, this explosive rise in rates mechanically excludes borrowers exceeding a debt ratio of 35% when they do not have the possibility of further extend the term of their loan (maximum 25 years in the old case) or mobilize an additional contribution. This is particularly the case for young first-time buyers or investors. For the others, the borrowing capacity decreases sharply.
To measure this impact, we have calculated in the tables below the difference in monthly repayments, necessary income, cost of credit and borrowing capacity of the borrowing periods of 20 and 25 years by taking the level of rates as they were in January 2022 (1% and 1.3%), the current level (3% and 3.3%) and the level they could reach by this summer (3.5% and 4%).
Overall, this shows that real estate purchasing power has already fallen by almost 20% and probably soon by 25%. Figures which can of course presage a more pronounced and lasting correction in prices even if many buyers can still draw on their savings to offset the leverage of the loan.
Monthly payments, necessary income and cost of credit
Borrowing €200,000 over 20 years at the rate of 1% required, for example, at the start of 2022, to repay €953 each month (insurance included at 0.20%). Today, we have already risen to €1,143 per month with rates at 3% and this summer we could reach almost €1,200 with rates at 3.5%. At the same time, the cost of such a loan (with insurance) would increase respectively from approximately €29,000 to €74,000 then to €86,000.
This also amounts to saying that with an equal purchase budget, it is necessary today to justify about 3,265 € of monthly income so as not to exceed the debt ratio of 35% imposed as a general rule by the banks while 2,720 € per month were sufficient before and that tomorrow it may take a little more than 3,400 € per month. Those who do not have such salaries and cannot mobilize additional contributions are forced to review their acquisition project for a less expensive city or a smaller area. But for many, this discourages them from buying…
Money & You | ||||
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1% rate | 3% rate | 3.5% rate | Potential gap in 18 months | |
Monthly payment (insurance included at 0.20%) | 953 € | 1.143 € | 1.193 € | +240€ |
Monthly income required | 2.720 € | 3.265 € | 3.408 € | +688 € |
Accumulated interest + cost of insurance | €29,000 | €74,000 | 86.000 € | +€60,000 |
Borrowing capacity over 20 years
For a given salary, the rise in interest rates therefore reduces borrowing capacity, unless the loan period is extended or more personal contribution is mobilized. By remaining over a period of 20 years, we see that a monthly repayment of 1,000 € (insurance included at 0.20%) allowed some time ago to borrow 210,000 €, an amount already fallen to 175,000 € today. today (-17%) and maybe €168,000 tomorrow (-20%). In other words, the purchasing power has already decreased by nearly 20% over this period.
Money & You | |||||
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1% rate | 3% rate | 3.5% rate | Potential gap in 18 months | Loss of purchasing power over 18 months | |
borrowing capacity | €210,000 | €175,000 | €168,000 | -€18,500 | -20% |
Total cost of credit | €30,000 | 65.000€ | 72.500 € | +€42,500 |
Borrowing capacity over 25 years
By pushing the reasoning over 25 years, the maximum borrowing period for a purchase in the old, we can even better measure the reduction in borrowing capacity linked to the rise in rates. For the same monthly repayment of €1,000, one could borrow up to €245,500 just over a year ago. This amount has reduced today to €197,000 (-20%) and will probably fall to €184,000 tomorrow (-25%).
This would lead to a budget difference of more than €60,000 which can correspond in some regions to two rooms less. All this with a cost of credit that has already exploded (+117%).
Money & You | |||||
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1.3% rate | 3.3% rate | 4% rate | Potential deviation | Loss of purchasing power over 18 months | |
borrowing capacity | €245,000 | €197,000 | €184,000 | -€61,500 | -25% |
Total cost of credit | €54,000 | €102,000 | €117,000 | +€63,000 |