Home loan – More stringent concession conditions – News

New rules force banks to be stricter in accepting mortgages. This could be a barrier to accessing loans, in particular for investors.

From 1uh January 2022, the criteria for accepting home loans have tightened. The recommendations of the High Council for Financial Stability (HCSF) have in fact become mandatory for all French banking institutions. They require that the debt ratio (the percentage of charges – including monthly repayment of the loan – in relation to income) of private individuals must remain less than 35%, regardless of their income. Furthermore, the duration of the loan is limited to 25 years old. Exceptions can be granted by banks, but only within a limit of 20% of all credits. Note that the rates are currently, on average, around 1% over 15 years, 1.15% over 20 years and 1.40% over 25 years. The HCSF established these rules in order to prevent possible slips observed during the 2000s.

“This measure alone affects a number of files, particularly those of average buyers, notes Patrick Cuvelier, broker of Ingénierie Concept Finance, but the most significant impact will concern rental investments, due to the new method of calculating the debt ratio in the presence of property income. “ Indeed, the HCSF recommendation with the biggest consequences for investors looking to buy a home for rent is the new method for taking discounted rents into account when calculating the debt ratio.

The most penalized rental investors

There are two ways to account for future rent in an investor’s budget. We can or we can:

  • o add rents to the income amount (standard method);
  • or subtract them from the amount of the charges (differential method).

At first glance, the two methods seem identical. In reality, the former is much more unfavorable to investors, because it reduces the relative share of rents by integrating it into the mass of income and therefore increases the debt / GDP ratio.

Let’s take the case where the rents bring 400 € per month, the income is 2,000 € and the charges are 950 € (500 € per month for the new loan and 450 € for the repayment of an old loan).

With the standard method, the debt ratio is established as follows:

Expenditure / income × 100
= 950 / (2000 + 400) × 100
= 39.6%

With the differential method, the debt ratio is determined as follows:

Expenditure / income × 100
= (950 – 400) / 2000 × 100
= 27.5%

Note that in reality banks will only retain 70 to 80% of the rent amount in estimating the debt-to-GDP ratio.

It is evident that with the same starting data, the debt ratio is contained below the barrier of 35% with the differential method, but exceeds it with the standard method. In this second case, the loan that would have been accepted yesterday will no longer be accepted today, with the new HCSF recommendations. Consequence: If you have not yet repaid the loan for your primary or secondary residence, the rental investment is now much more complicated.

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