"Rescuing" the mortgagee is a good idea, although it may seem like it encourages incorrect behavior - Kasamim Noticias
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Mortgage “bailout” is a good idea, although it may seem like it encourages bad behavior

Mortgage “bailout” is a good idea, although it may seem like it encourages bad behavior

Last week, the Government announced that it had reached an agreement with the banks to relieve mortgaged families before interest rates rise. While initially such a headline may seem like bad news, as interest rates are barely rising and we are already seeing “bailouts” for those who have borrowed beyond their means, if you do a little research into the specific measures, you will see that they are not so bad.

Whenever there are reliefs for groups that have engaged in excessive risky behavior, the impression is given that wrong behaviors are being encouraged and therefore it is not a good idea. But on this occasion there are several factors that make the measurements correct.

What the Government agreed with the bank

The first thing is to review what was agreed. It's basically a modification of the Code of Good Practicewhose adherence by banks is voluntary, but mandatory compliance once they have decided to join.

What is the French amortization system?

These modifications are two: one for the most vulnerable families (with incomes less than three times the IPREM, 25,200 euros per year) and families with some slightly less vulnerability (incomes less than three and a half times the IPREM, 29,400 euros).

The most vulnerable families have a two-year grace period, a reduced interest rate in these years and extend the mortgage term up to seven years. It is estimated that 300 thousand families can benefit from this measure.

Households meeting the second income criterion may benefit from some improvements if their mortgage payment exceeds 30% of income and if the payment has increased by at least 20%. In this case they can freeze your quota for 12 monthshave a reduced interest rate during this period and extend the term up to seven years.

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In addition, the costs of changing the mortgage from variable to fixed rate will be reduced and it will also be they will reduce commissions for early repayment. An interesting topic because it can make a big difference.

Good for those affected, good for the banks, no public money

The first positive news is clear: these measures are a relief for vulnerable families whose mortgages are rising. Regardless of whether they were reckless in not predicting an increase in rates that all the experts announced (because really the mortgages most affected by installment increases are those signed in the last five years, due to the French amortization system) the truth is that generally This type of family has less information.

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If history tells us that great experts are capable of underestimating market risks (just look at the behavior of banks around the world just before the Great Recession), let's say no more. people with low income.

On the other hand, the measure benefits banks, which prefer to have a slightly lower income in the short term than having to maintain houses that they do not know how to sell correctly and which is not their main business. Banks therefore also benefit from these measures, which are also clear and awake.

And finally, there is a third big advantage: there is no talk of putting public money to relieve families. They are simply relief measures in which the government mediated between many affected but unconnected families and the bank.

Are they perverse incentives?

The main criticism that can be made of this measure, therefore, is that it can encourage incorrect behavior, that is, they are perverse incentives. Anyone thinking about taking out a mortgage now, rather than taking out a fixed rate mortgage as has been recommended for years, will take out a variable rate and If they come bad, you'll know there's a rescue.

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However, if the measures are studied carefully, it becomes clear that yes, they are a relief in the short term, but the cost is being paid by the mortgagee (along with the banks for a certain period at lower rates). Grace periods or payment freezes mean that the principal increases, which means that when the house payment ends more than initially agreed will have been paid.

Extending the mortgage term up to 7 years has the same effect: the payments are lower, but at the end of the life of the mortgage, more will have been paid. It is, therefore, a temporary relief, but one that does not imply a “ransom” per se. Therefore, no one should consider these mechanisms if they are not considered strictly necessary to save the family economy. They are not, in my opinion, perverse incentives.

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