What is the French “Taux d’usure” and what is its role?
The “Taux d’usure” is the maximum APRC (annual percentage rate of charge) which an individual could expect from a loan. A loan is considered usurious (understand illegal) when it is granted at an APRC that exceeds by one third the average effective rate charged during the previous quarter.
In France, the APRC (known as TAEG) is composed of:
- the base interest rate (or nominal rate),
- fees, commissions and various remunerations (registration fees, application fees, mortgage tax, broker fees for example) – the notary fees are excluded as they exist regardless of the mortgage (they are purchase-related).
- and possibly borrower insurance premiums when mandatory insurance is taken out simultaneously.
Why does it exist?
Fixing a usury rate protects the borrower against excessive rates offered to him – “Too high interest rates could put the borrower in a difficult financial situation, and, on a larger scale, destabilize the overall economy”. It plays a regulating role.
The first rule when applying for a mortgage to a French bank is to avoid crossing the 33% debt-to-income ratio. For some exceptional circumstances (particularly high earners) it can be pushed to a maximum of 40%… but that is not the only thing to look at!
Increasing a maximum debt-to-income ratio is a matter between you and the bank, but if unfortunately your profile justify an increase of assurance costs (something we see happening with our senior clients or clients with a medical past), it is likely possible that the APRC will may be higher than the “taux d’usure” … and as we previously said, this is against the regulations in place! The bank has then 2 choices: reduce the mortgage rate or the bank fees to reduce the APRC to the ‘’taux d’usure’’ level (but then it is ‘’killing’’ its profitability) or just refuse the application. In most of the cases, the bank decides to make a gesture (so do we) as a lot of work has been done but it happens that the bank just plainly rejects the application.
But keep in mind that offers differ from a lender to another. At FPF, we have partners who offer solutions which allow us to avoid getting blocked by the taux d’usure (such as waive the life insurance!).