While a few years ago some credit institutions boasted Anglo-Saxon banking practices that allow borrowing over 40 or even 50 years, now the financial crisis is leading them to reconsider their position.
The increase in duration in good years
Real estate experienced its heyday in the decade 1998-2008. Prices per square meter doubled and every investor at the time was almost certain to realize a capital gain. It is in this favorable economic context that the banks have granted mortgages with great generosity.
Many at the time considered this policy too lax because it did not meet the rigor required by the profession of banker and the distribution of credit. Exceeding the debt ratio of 33%, financing at 110%, risk analysis often virtually absent, these were the criticisms that could be leveled at universal banks .
To keep up with housing price inflation, lower interest rates and accession aids such as zero-interest loans were not enough. Wages had not followed this spectacular increase and candidates for first-time buyers were unable to acquire with loans whose duration was between 15 and 20 years, which were the standards of the time.
To allow borrowers to follow the rise in real estate prices, some specialized establishments then began to offer loans over 25 years. The commentaries of the time mentioned the fears aroused by such an extension of the duration. It must be said that the average duration of mortgages at the time was less than 18 years.
The very approach of the borrower was quite different. Before 1998 it was often a question of obtaining the lowest cost of credit and therefore of borrowing over the shortest duration.
The reality of the markets therefore forced buyers to accept the proposals of specialized establishments which offered longer and longer terms . Network banks, reluctant at first, ended up following suit. Thus, very quickly a term of 30 years became a “standard” for financing a real estate acquisition.
Very long terms (over thirty years) were offered only by credit institutions, but they rarely exceeded 35 years. 40-year loans were still offered and found takers, despite the impact on the cost of the mortgage .
The crisis is forcing banks to reduce the duration
The trend has completely reversed for at least two reasons. First of all, the current banking policy in terms of credit is essentially based on a rigorous analysis of risk. It is not certain, moreover, that the intentions of the banks is to grant fewer mortgages than in the past, but it is clear that the commitment services have stricter instructions today. Thus, among the various assessment criteria, the points concerning indebtedness and personal contribution are analyzed without benevolence.
Regarding the duration, most network banks have lowered the maximum duration of 5 years and no longer offer loans over 25 years. They even focus their policy on loans over 20 years, or even on shorter terms. Specialized banks are following the same path, even if they still offer terms of 30 years today.
The second reason comes from the obligation imposed on banks to reconstitute a sufficient level of capital in order to avoid the financial routs that have punctuated the current crisis. This objective will ultimately be easier to achieve if the duration of customer commitments is shorter, and therefore if the duration of real estate loans is reduced.