It’s the old story of a country losing its AAA status leading to ordinary punters having to pay more for their mortgages. However, the recent downgrade is not the only reason for the increases to the cost of borrowing in France. The margins banks are charging each other are also increasing as banks seek to rebuild balance sheets after losses in Greece and the economic slowdown. These increases are now being passed on to the public. The net effect is a lack of appetite for lending and borrowing in France with each application being carefully studied and selected by both banks and consumers. Bank margins over the applicable reference index have now increased by 20 basis points with the average now over 2% with many capped rates over 3% and fixed rates still looking good with margins under 2%.
French variable rate mortgages have the lowest margins of all French loans, though we are also seeing sharp increases here, even as the Euribor is decreasing. The 3 month Euribor rate has fallen 20 basis points over the last month and now stands at 1.13% just above the ECB base rate of 1%. The extra money which the ECB has put into the system has delivered the required liquidity to keep the banks lending and has also brought Euribor rates tumbling down. Further cuts to the base rate are not being priced in at the moment so we should be set for a period of stability as we await the results of the latest round of high level European talks. Needless to say base rate hikes are not on the cards either though we may see further increase to bank margins for variable rate loans which are currently in the region of 1.50% to 2%.
With fixed rate mortgages, the idea is that French banks have to pay marginally more than the government does for their borrowing so all increases in the cost of borrowing for the government are generally passed straight on to the banks. We can see these increases via the TEC10 index which gives a strong indication of 10 year French government debt and commercial bank wholesale rates before adding a margin for anyone seeking fixed rate funding from banks. October and November saw the TEC10 put on 1.50% from historically low levels of 2.50% to above 4% as the fallout from Greece continued. Since mid-November the index has fallen back to almost 3%, with a peak rate in January of 3.40% coming before the downgrading by Standard and Poors of French government debt. The upward pressure on the TEC10 will come from either the likelihood of economic improvements and ECB rate rises or worsening of the French reputation with the rating agencies both of which seem unlikely at this stage. Good 25 year fixed rates are available from 4.60% at 80% loan to value.
In terms of our view of the market, we are seeing an increase of activity and enquiries after an exceptionally quiet last quarter of 2011. We are seeing lots of activity at both the high and low ends of the market with the middle range purchase price seeing the largest decrease in terms of numbers of purchases going ahead. The market for French property seems to be picking up again with many of our partners also starting the year well. We see the outlook for French mortgage rates to be fairly stable with some upward pressure over the next six months.
Best wishes for the New Year.