Negative amortisation
A technical situation in which the borrower's monthly payment is insufficient to cover the interest generated in the period. Uncovered interest is capitalised and added to the outstanding balance, which increases rather than decreases. This can arise on certain uncapped variable-rate loans or in a poorly calibrated total deferral. It is rare in French residential lending but the broker must be able to explain it.
Key points
- Uncovered interest is capitalised and added to the outstanding balance.
- This can occur on uncapped variable-rate loans with a constant instalment.
- A poorly calibrated total deferral can also lead to it if intercalary interest accumulates.
- Rare in standard French residential lending, it is more common in commercial finance.
Frequently asked questions
How can negative amortisation occur on a variable-rate loan?
On some variable-rate loans with a fixed instalment, if market rates rise sharply the interest portion can exceed the agreed monthly payment. The shortfall is rolled onto the capital, which grows. This situation arises mainly on uncapped loans with a payment locked for the full term.
What mistakes should be avoided to prevent negative amortisation?
Choosing capped loans ensures that rate increases are limited. In the case of total deferral, the period must be calibrated so that intercalary interest remains manageable and does not capitalise beyond what was anticipated. The broker checks in the amortisation schedule that the outstanding balance decreases from the first active period.
Is negative amortisation legal in France for residential mortgage loans?
It is not explicitly prohibited, but it is extremely rare because lending conditions and the mortgage credit directive (transposed into French law) require borrowers to be informed of all adverse scenarios. French banks avoid this mechanism for residential loans, notably through the obligation to include caps on variable-rate products sold to retail clients.
In practice
A borrower takes out an uncapped variable-rate loan with a fixed monthly payment of €800. If rates rise sharply and monthly interest reaches €850, the shortfall of €50 is added to the outstanding balance each month.
Official sources
- Obtaining a mortgage loan · Service-Public.gouv.fr
- Mortgage credit (official guide) · Service-Public.gouv.fr