If tracker mortgages were the flavour of last month then fixed rates will be all the rage in September. Rates for fixed rate French mortgages have fallen significantly in the past year but the recent dramatic drop in the TEC 10 index (explained below) indicates that we should have the lowest fixed rates ever to be offered in France next month. The last time average fixed rates in France were below 3.50% was back in Q4 2005 when the TEC 10 was above 3%. With the TEC 10 now as low as 2.60%, a fall of around 40% in August alone, this could herald fixed rates at levels unseen in decades.
In an environment where French property prices are now stable but with sellers likely to be tempted by fair offers, now really does seem like a unique opportunity to buy a French property, especially with the security that a fixed rate mortgage brings.
The TEC10 is an index used by French banks to set their fixed rates. It is the daily long-term Government bond index, corresponding to the yield-to-maturity of a fictitious 10-year Treasury note. Banks borrow money from the markets based on this index and then provide loans to the borrowers plus the appropriate margin. The TEC 10 rate currently stands at 2.60% which is a historic low. So, what has caused the TEC 10 to fall this low?
The first reason is the outlook for inflation. The markets are predicting sluggish growth over the next five years and perhaps beyond. This means that when the markets look at the price of a 10-year bond, they can set the rates lower if the outlook for inflation is lower. Conversely, in a bull market with high levels of inflation, the rate will have to be higher because otherwise the net yield, once you deduct inflation, would be extremely low and nobody would buy the bonds – consequently the price has to rise.
Which brings us to the second reason. Many investors are seeking safe havens for their money, which means things like 10 year government bonds, corporate bonds from banks, institutional bonds which are all based on the TEC10. As we all know, with supply and demand, when there is a lot of something, the price becomes cheap-and there are a lot of people wanting to buy bonds and the aim of the game is to sell them as cheaply as possible