Combining interest-only and conventional loans, extending loan terms: what options are there to revive property financing?
Restoring French households’ property purchasing power: this is the line taken by the government, which considers that the banks must make an effort. One option is a hybrid form of financing, combining a conventional repayment loan with an interest-only loan. Is this option worthwhile?
01Understanding the difference between repayment and interest-only
When you take out a conventional repayment loan, each monthly instalment repays part of the capital borrowed, with interest on the outstanding capital. With an interest-only loan, the instalments comprise only interest and any insurance premiums: the outstanding capital does not decrease, interest is calculated each month on the same basis, and the capital is repaid in full only with the final instalment.
The proposed scheme works as follows: you take out a 20- or 25-year loan not on 100% of the price but on 80%, repaid in the conventional way. The remaining 20% stays in the form of a mortgage on which you repay only the interest, the capital being repaid only on resale.
02The figures
The problem: for identical characteristics (amount, rate, term), an interest-only loan generates a higher total amount of interest than a conventional loan. For a loan of €300,000 at 4% over 20 years (excluding insurance and fees):
- Repayment loan: monthly instalment of €1,818, total cost of credit of €136,306
- 80% repayment and 20% interest-only structure: €1,454 repayment + €200 interest-only = €1,654 monthly instalment, for a total cost of credit of €217,045
This structure would reduce monthly instalments by 9%, at the price of a substantially higher overall cost. The services of a valuer will be indispensable to secure the interest-only structure, in particular for the valuation of the property provided as collateral.
03Extending loan terms
A second option under consideration is to extend loan terms. The maximum term for a mortgage is currently set at 25 years, with the debt-to-income ratio capped at 35%. However, 27-year loans are being considered for purchases where renovation works account for more than 10% of the cost. In 2022, housing expenditure accounted for 23% of household disposable income.
By way of illustration, for €300,000 borrowed at 4%, the monthly repayment is €1,818 over 20 years, €1,608 over 25 years and €1,515 over 27 years. In both scenarios, the overall cost of the loan will be substantially higher, but this will no doubt be the price to pay for access to financing.
In both scenarios, the overall cost of the loan will be substantially higher, but this will no doubt be the price to pay for access to financing.
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