How ECB Rate Cuts have affected French Mortgage Interest Rates

The European Central Bank have reduced their base rate no less than 7 times since October 2008, but many people are asking how this is reflected in French mortgage interest rates.

Why are fixed rates still high?

Many of our customers ask why fixed rate mortgages have been less affected by the decrease in interest rates. An explanation for this is the lenders base their fixed rates on longer term indexes such as the OAT 10 year, whereas tracker rate mortgages are indexed against shorter term indexes such as the Euribor (Euro Interbank Offer Rate). This is because fixed rate mortgages in France are often fixed for the entire duration and whilst the most popular duration is 20 years they can in some cases go up to 40 years! The OAT 10 year has already decreased since summer 2008 and fixed rate mortgages have come down from nearly 6% to less than 5% in the majority of cases.

How about a tracker rate?

Tracker rate mortgages are currently offering substantially lower interest rates, in most instances you can expect to pay under 3% making them very attractive, although should interest rates rise you may end up paying a lot more than now.

A tracker rate is based on a Euribor index, such as the Euribor 3 Month or 1 Year index, plus a fixed margin for the bank. The Euribor 3 Month index has reduced dramatically, from 5.090% on October 16th 2008 to 1.313% on May 8th which has had a significant impact on tracker rate mortgages.

Many lenders offer protection against rising interest rates and will limit the increase in your monthly repayments to the increase in inflation, but will increase the duration of your mortgage instead. Some lenders also offer a cap on the maximum increase in the duration of your mortgage, which with the current low rates can offer you peace of mind for the future.

For those who already have a tracker rate mortgage and are wondering why their interest rate is still high, it is important to check the review date of your rate. If you are on the Euribor 3 Month index this should be reviewed every three months, Euribor 1 Year every 12 months and will normally take into account the average rate over the past period. If you are unsure, you should contact your lender or broker to enquire when your next review is due.

Getting the best out of both - Cap & Collar

If you wish to combine lower interest rates and the security of a fixed rate, then Cap & Collar mortgages are likely to be the most suitable option for you currently. With starting rates as low as 4.05%, a Cap & Collar +1/-1% means that your mortgage can never go higher than 5.05% or lower than 3.05%. With a Cap only marginally higher than most fixed rate options you have the security of knowing your maximum interest rate, yet at the same time you can benefit from the current low interest rates. Furthermore, most Cap & Collar mortgages allow you to make over payments or completely redeem your mortgage without any early redemption penalty.

To find out more, or to discuss suitable mortgage options please contact French Mortgage Direct on 0800 970 9304 or visit www.frenchmortgagedirect.com