ECB’s low rates will boost French mortgage market

The European Central Bank’s (ECB) interest rate cuts have forced down the cost of mortgage loans in France, supporting borrower renegotiations and prepayments, said Moody’s Investors Service. In 2015, new mortgage origination amounted to EUR 202 billion. Of new loan origination, 36% related to remortgaging.

“Borrowers are taking advantage of low mortgage rates, which has led to a high level of loan renegotiations. Rates are likely to stay low beyond Q1 2016, which will support new mortgage lending and house price,” said Carole Bernard, a Senior Analyst at Moody’s.

“The French housing market experienced a good 2015, as sales were up 15.7% year-on-year. French banks have big ambitions to expand their share of the domestic mortgage market in 2016, targeting clients looking to remortgage their homes and first-time buyers,” added Greg Davies an Assistant Vice President at Moody’s.

The rating agency said fixed-rate mortgages have benefited from the ECB’s loose monetary policy, with an average mortgage rate of 1.9% in March (2.12% for new houses and 1.93% for second-hand homes). By Q1 2016, the proportion of fixed-rate loans completely dominated the market, with floating-rate loans making up 0.4%. Low rates are fuelling demand for remortgaging and increasing the prepayment rate across French residential mortgage-backed securities (RMBS). Remortgaging accounted for 36% of banks’ new mortgage lending to households at the beginning of 2016.

Higher prepayment rates have built-up credit enhancement in French RMBS, providing financial support to cover losses in adverse conditions, which prompted upgrades last year. However, for investors in French RMBS, prepayments will reduce the weightedaverage life of RMBS transactions, as tranches pay down faster, resulting in reinvestment risk.