Should the usury rate for mortgages be eliminated?

While the usury rate was reported to have risen at the end of March, mortgage rates are actually falling. This unexpected situation raises questions about the usefulness of this maximum rate at which banks can grant loans.

The usury rate, published periodically by the Banque de France, is a maximum “all-inclusive” rate that includes the loan’s nominal interest rate, the cost of borrower’s insurance, and the various fees associated with obtaining a mortgage. Its primary purpose is to prevent abuse by banks. However, given the continuous rise in the usury rate, one might wonder whether it is truly fulfilling its protective role.

A paradoxical situation: falling interest rates and a rising usury rate

The Banque de France published the new usury rates applicable to mortgage loans on March 27. For loans with terms between 10 and 20 years, the maximum all-inclusive rate may not exceed 6.13%, and 6.39% for terms longer than 20 years. These rates have increased compared to the previous usury rates, which were in effect during the first quarter of 2024.

This situation is all the more surprising given that mortgage interest rates are falling. In fact, in mid-December, rates on new mortgages averaged about 4.5 percent, compared with 4 percent today. The increase in the usury rate applicable during the second quarter of 2024 therefore seems paradoxical.

A discrepancy between market practices and changes in the usury rate

The usury rate is calculated based on the average rate charged by banks during the previous quarter, to which one-third is added to allow banks some flexibility. Consequently, there is inevitably a lag between market practice and changes in the usury rate. For example, the usury rate for the second quarter of 2024 is calculated based on the average mortgage rates granted by banks during the first quarter.

A Controversial Usury Rate

The usury rate has been a frequent target of criticism, particularly during the sharp rise in interest rates between 2022 and 2023. Its adjustment, deemed slow and out of step with market conditions, prevented many borrowers from obtaining mortgages. The Banque de France subsequently changed its calculation method by updating the usury rate monthly, rather than quarterly, to better reflect market conditions.

Today, as interest rates are gradually falling, the Banque de France has reverted to a quarterly calculation method. However, the current discrepancy between falling interest rates and a rising usury rate is reigniting criticism.

Despite this criticism, the usury rate remains an essential safeguard against potential abuses by banks and an important component of consumer protection, even if it is imperfect. If interest rates continue to fall, the usury rate for the next quarter is also expected to decrease.