It is often said that high inflation times can be a time when credit rates are attractive. In the current environment, even though the government has stated that rents will increase by a maximum 3.5% per year, investors still have options. Here's how.
According to INSEE, June's inflation could rise to 5.9%, up from 5.2% in May. It could rise to 6.8% by 2022. It should therefore reach 5.5% by 2022 as an average annual rate. This is a level that has not been seen since 1985.
Julie Bachet (Managing Director, Vousfinancer), a real estate loan broker, says that banks have increased their lending rates in the context of rising real-estate prices and higher government borrowing rates. This has been especially true in March and April. Credit rates have increased by 0.5% per annum, with some banks allowing for a rise of up to 0.75%.
The current average rates are 1.3% over 15 years, 1.55% for 20 years and 1.7% over 25 years.
Real rates are still very favorable, as they are negative (i.e. there is more inflation than 5.5% per annum in 2022) and rates of 1.50% for the past 20 years. -4%). The nominal interest rate, minus insurance and costs, is the real rate.
In this instance, we claim that we can make cash. Vousfinancer explains that even in times of inflation it can be interesting to purchase a loan because the monthly payment remains the same throughout the loan's term. The relative weight of the loan decreases in comparison to other expenses. However, it is more important in household budgets when the borrower's income increases. This can lead to a decrease in the debt ratio.
If you assume a 2.5% salary increase per year, your debt ratio for EUR3,500 base salary and EUR1,000 monthly loan payments goes up to 28.6% to 22.9% over 10 years.
The broker states that this only applies if income rises, and ideally, as much as inflation. This is not always the case. People who earn the minimum wage are not likely to be interested in purchasing during periods of inflation. This is because they are severely penalized by rising rates and property prices in the short-term, even though the minimum wage has been successively increased.
Investors see inflation as having two effects: a possible increase in salary, but also due to the revaluation rents. Rents are theoretically indexed to inflation using the index rental benchmark (IRL), calculated by INSEE. The IRL was 133.93 in the first quarter of 2022. It grew by 2.48% in a year.
The inflation situation is such that the rents should have risen further and faster in the next few months. The government made an act of kindness to tenants and proposed to limit rent increases to 3.5% per year. The increase in rents during inflation is still effective, even though it has been capped. For investors, this means that the monthly payment of the credit will be the same for the term of the credit. However, the rents required to repay the loan in part will increase which reduces the monthly savings effort. Sandrine Allonier (director of studies, spokesperson for Vousfinancer) says that this is true.
The monthly effort rate is calculated assuming a 2.5% annual salary rise and a 3.5% annual rent increase. It goes from EUR200 up to -EUR90 over 10 years. The tax impact of rising rents on investors is minimal even if they borrow at higher rates. Investors can deduct more of their rental income as loan interest. How to view inflation with a new eye...
