The 3 reasons behind the rise in interest rates

The rise in prices is gaining ground, including mortgages. While in 2021 it was possible to borrow at around 1% or even less from some banks, the trend is now on the rise. Why are interest rates rising? LeLynx.fr reveals the 3 main explanations.

According to data from the CSA Housing Credit Observatory, interest rates were 1.38% in May. The rise is all the more rapid since in April, the rates stood at 1.28%. In just 3 months, interest rates have changed from 28 dots.

However, it should be noted that in 2021, they were exceptionally low: 1.06% on average . This is also one of the reasons why borrowing rates are rising.

The exceptional character of the year 2021

In 2021, these are nearly 1.2 million real estate transactionsthat have been concluded, i.e. nearly 270 billion euros in real estate loans . This year has been an excellent year for professionals in the sector. The Covid pandemic has turned many lives upside down and has changed the outlook of many French people. They want more space and financial institutions have understood this.

What banks have also noticed is that they no longer need to post competitive rates to attract borrowers as they present themselves to buy a home! Some banks have raised their interest rates from the start of 2022.

The new regulations

In 2022, several new developments could impact the profits of banking establishments. the High Council for Financial Stability (HCSF) has established new borrowing rules:

  • The effort ratio of borrowers is limited to 35%(this is the ratio between annual income and annual borrowing costs);
  • The maximum repayment term is set at 25 years (with a maximum of 2 years grace period).

These new regulations, in force since 1uh January 2022, will likely reduce the number of borrowers. Until then, some consumers were indebted for more than 25 years.

The infra-annual terminationcould also seriously affect the turnover of banks. Indeed, it is now possible to terminate your borrower insurance at any time! Until then, consumers must wait for the anniversary date of their contract to change insurance. Since 1uh June 2022, you can terminate your contract for any new credit. For those in progress, you still have to wait until 1uh september.

A blow for the banking establishments which hold 88% of the borrower insurance market .

Do not hesitate to regularly compare borrower insurance contracts! The main objective of this law is to promote competition. The government hopes to save borrowers between €3,500 and €4,000.

In summary, banks seek to reduce the impact of these measures on their margins by increasing their interest rate .

Inflation

inflation

L’price increase is palpable at all levels. Electricity, gas, fuel, food… Consumer bills keep growing! currently, the consumer prices increased by 5.2% year on year (Insee data for the month of May 2022).

This inflationrecently pushed the European Central Bank(AEC) to raise its key rates for the first time since 2011.

In fact, the level of inflation has reached 8.1% in the euro area! Or, the ECB must maintain inflation of 2% for its key rates in order to reduce the risks of an uncontrolled rise in prices. For this, the European institution has therefore decided to raise its key rates. The objective is to discourage consumers from borrowing, as well as companies, and consequently to curb the rise in prices.

What is a key rate?
This is the interest rate set by a financial organization relating to a zone or a country. Within the euro zone, the European Central Bank determines three key rates. The one that impacts consumers the most is the refinance rate. From this rate, commercial banks, from individuals take out mortgages, set their interest rate.

Consequently, by increasing its key rates, the ECB’s decision will soon have an impact on the interest rates charged by financial institutions.

Rates remain relatively low

Good news for those who come to take out a loan during the year at: rising interest rates won’t be as dramatic as inflation!

According to specialists, some interest rates could reach the 2% by the end of the year. So, if you borrow at a rate of 1.5%, it remains relatively accessible.

Just one piece of advice from professionals in the sector: if you have a real estate crush, don’t wait!

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