What is the impact of the current rise in real estate rates?, Real Estate News/Analysis

Since the beginning of the year, the rise in mortgage rates has been quite brutal. Still very low in January, rates rose by an average of 50 basis points after accelerating in March and April linked to the sharp rise in bond rates (10-year OAT). To sum up, while we could still quite easily finance ourselves at 1% over 20 years a few months ago, the banks are now offering 1.5% and it is likely that this upward movement will continue because inflation there participates by directly influencing monetary policies which have no other solution than to raise their key rates.

Faced with real estate prices which have increased significantly in recent years, the rise in interest rates will automatically exclude more borrowers exceeding a debt ratio of 35% when they do not have the possibility of further extending the duration of their loan (maximum 25 years in the old one) or to mobilize an additional contribution. This is particularly the case for first-time buyers or investors.

To fully understand this impact, we have calculated in the tables below the difference in monthly repayments, necessary income, cost of credit and borrowing capacity for a borrowing period of 20 years by taking the level of rates as they were in January 2022 (1%), the current level (1.5%) and the level they could reach by the end of the year (2%).

Monthly payments, necessary income and cost of credit

Borrowing €200,000 over 20 years at the rate of 1% required, for example, to repay €953 each month (insurance included at 0.20%). Today, we have already gone to €998 per month with rates at 1.5% and we could reach €1,045 tomorrow with rates at 2%. At the same time, the cost of such a loan (excluding insurance) would respectively increase from €20,749 to €31,622 then to €42,824.

This also amounts to saying that with an equal purchase budget, it is necessary today to justify about 2,850 € of monthly income so as not to exceed the debt ratio of 35% imposed as a general rule by the banks whereas 2,720 € per month were sufficient before and that tomorrow it may be necessary not far from 3,000 € per month.

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 200,500 € today. today and maybe €191,500 tomorrow.

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 loss of borrowing capacity linked to the rise in rates. For the same monthly repayment of €1,000, one could borrow up to €245,500 a few months ago compared to €232,000 today and perhaps €219,500 tomorrow. We would thus arrive at a budget difference of €26,000 which corresponds in quite a few regions to one room less. All this with a cost of credit which is increasing sharply.