Mortgage credit reform aims to boost consumption

The government is counting on the development of new techniques such as rechargeable credit and the establishment of a mortgage life.

On Wednesday, 22 March, the Council of Ministers endorsed the reform of the “law of security rights”. This includes two new features: the creation of a rechargeable mortgage loan and the establishment of a mortgage life annuity.
The first will allow a borrower to apply for a new loan on a mortgage already registered. Its borrowing capacity will depend on the level of repayment of the first credit associated with this mortgage. For example, if an individual borrowed 100 000 euros to buy his house, the loan being mortgaged on this property, he can again subscribe a credit of 50 000 euros which will be pledged on the house, if he already refunded 50 000 euros on his first loan. For current mortgage loans, an amendment to the initial contract must be signed by the bank in order to benefit from this measure. New loans associated with the mortgage can be purchased at any credit institution.

The mortgage life is for seniors who want to get money from their home without having to sell it. This credit will be paid either in the form of a capital or in the form of a life annuity. It is only refunded after the death of the borrower by the sale of the property. If the selling price exceeds the debt, the heirs recover the balance. In the opposite case, the bank loses some of its credit and the debt is not passed on to the heirs.

It remains to be seen whether these two products, of a complex handling, will know a strong development. Mortgage credit is, compared to other European countries, little developed in France. It is estimated in Bercy that the reform could increase the outstanding mortgage loans by 10% by 2015.

The bankers, who at first were not “takers” of the reform, are beginning to take an interest in it.

“It arouses a keen interest in our clientele, especially the mortgage life, which can be of great service to seniors who want to start a business, help their children or grandchildren or ensure additional greatness,” says Véronique Bouggler of the brokerage firm Ailleau Bougardier.

Crédit Foncier says it is ready: “The mortgage is an excellent guarantee but its registration in the real estate file is in France much too expensive, which is not justified with a scale unnecessarily complicated”, underlines François Drouin, its president. “Reducing these costs is critical to the success of the reform,” he says. Bercy is expected to release the new mortgage fee schedules by the end of the month.

The government is counting on the development of these new credits to support consumption. The French are already using borrowing more easily. “Consumption increases faster than purchasing power: households save less money and use consumer credit,” says Nicolas Bouzou, an economist at Xerfi. “Over the last two years, household debt has increased by 22%,” observes Marc Touati, an economist at Natexis Banques Populaires. To encourage them to borrow even more is it wise?

“The reform is good, but there is a timing error, ” Judge Touati. “To support consumption in the short term, we risk putting households in a difficult situation if employment does not restart, ” he says. The household debt ratio is still half as high as in the United States. “But, on the other side of the Atlantic, the unemployment rate is also half as high,” says Touati.

Another threat: the rise in rates. So far, it has had no impact on the ability of French people to borrow. “If the European Central Bank raises its key rates above 2.75%, it will have a strong impact on the rate of credits,” says Bouzou.