Cap and Collar mortgages, Fixed rates and Fixed payment mortgages

Over the course of the past month, more French banks have reduced their initial rates for non-resident mortgages in France. Although, the amounts are small, generally 0.1%-0.3%, these reductions do reveal increased competition in the market. The next point of competition will come when the overall spread, the amount of interest the bank adds to the loan as a margin, starts to fall again. These margins are approximately 35% higher than 5 years ago and should normally fall in line with increases in confidence and economic activity and rises in the European Central Bank rate.

In the medium term, I do not see the overall rates for new mortgages rising all that much, as there are still many structural problems in most European economies which make a return to growth and confidence still at least 12-18 months out. Any increase in the ECB rate should also see some accompanying reductions in the margins, keeping things quite stable in the medium term. In an interesting development today we can now offer a fixed rate interest only mortgage of 4.75% for 10 years, one for the investors.

As the general consensus is that rates will rise when the economy picks up, many of our clients are interested in mortgages which have a cap beyond which the rate cannot exceed. Rates are available from 3.75% on a +1%/-1% basis where the rate can increase by no more than 1% nor decrease by any more than 1%. Versions are also available at +2%/-2% and higher with the durations for these rates varying from 7 years up to 25 years. One thing to watch out for with cap and collar mortgages is the fact that the margin is only set on the day the mortgage is taken out.

Alternatives to the Cap and Collar mortgages are of course fixed rates starting at 4.10% for 25 years on a repayment basis and 4.75% for an interest only mortgage fixed for 10 years at high loan to values. In addition, the curious and popular ‘elastic duration’ French loans are available from 2.6% over 30 years. These ‘elastic’ loans with variable durations have a fixed monthly payment but the duration of the mortgage can extend by up to 5 years. Once the limit of 5 years is reached, your monthly payments can then start to increase, but by no more than French inflation per quarter or year depending on which Euribor index the loan is based on.