Introduction
In this article we will explain:
- everything you need to know about the French-style amortisation plan;
- how to identify a French-style amortisation plan;
- what are the consequences following the identification of a French-style amortisation plan
We therefore advise you to read the whole article to the end to find out how to contact us and proceed with the analysis of your banking relationship.
The French-style mortgage represents a amortisation schedule of a loan or financing widespread in the bank.
The main feature of theFrench-style amortisation lies in the fact that the repayment schedule is based on instalments at fixed amount composed of a decreasing interest rate that can be fixed-rate and variable-rate and an increasing capital share.
Let's see it in detail.
We also invite you to watch this explanation video on French-style mortgage amortisation schedules.
How a French-style amortisation plan works
When we purchase a service or asset, such as a real estate unit, using a financial institution to cover the investment, we contract with the institution a loan repayment schedule in instalments, typically on a monthly basis.
Obviously any loan involves a interest share which is to be added to the amount disbursed for repayment purposes. Under the French method, the instalment will have a fixed amount.
The monthly planned instalments will therefore take into account two specifications quotationthat of the interests and that capitalthe latter being strictly related to the amount disbursed.
Although the amount of the instalments is fixed, their composition.
In the case of the French-style amortisation plan in the first part of the agreement will be paid instalments whose percentage of interest share will be higher than the capital sharethen decreasing and reversing the proportion in the course of extinction.
In the final part, therefore, the instalments will mainly consist of quota capital and an increasingly small interest component.
This plan is therefore aimed at guaranteeing the priority return of accrued interest disbursing the amount, regardless of the duration of the relationship itself.
French-style mortgage calculation: how it is done
Here is a simple example of French-style mortgage calculation.
Suppose you apply to the bank for a loan of 100.000 € for the down payment of a house. Using the French method, let us assume that this amount is payable with interest rate at 4%. This means that the contractor will have to return to the institution 104.000 €.
If we assume that the agreement is on a two-year basis, the amortisation schedule will provide for 24 instalments of € 4,333 each.
What will vary, as mentioned, will be the interest rate. A plausible assumption is to imagine an interest rate at the 2% (calculated on the full amount) for the first instalment, which will then consist of 2.080 € interest rate and 2.253 € of capital share.
The following month, that same 2% will no longer be calculated on the full amount to be repaid (104,000 €) but obviously on its residual amount (104.000 – 4.333 = 99.667 €), so the instalment of €4,333 will consist of 1.993 € interest rate and 2.400 € of capital share.
This change, decreasing for the interest portion and increasing for the capital portion, will be constant over time.
French-style mortgage: pros and cons to consider
Although it is a widely used method for different types of private financing, real estate loans and so on, it is always good to keep in mind the main advantage and disadvantage of the French-style amortisation plan.
The biggest advantage is that related to theinvariability of instalments over time, which allows planning the return plan in detail since the signing of the agreement.
The biggest disadvantage is related to the fact that early loan repayment is always less convenient as time goes byprecisely because the amount of interest that can be saved by settling the loan in one lump sum decreases month after month.
French-style amortisation and anatocism risk
The phenomenon ofanatocismwidely described by legal historiography, is a system that until a few years ago was widely used by banking institutions that provided for the production of interest on already capitalised interest.
The judgments of recent years have followed a revision process that today limits the possibility of implementation, which nevertheless appears to be a starting point remote in the French-style mortgage precisely because of its characteristics.
Anatocism is in fact a system of recalculation on the basis of accrued interest and accumulated on debta hypothesis that cannot, however, be verified in the French method by virtue of the interest calculation based on the residual capital, which does not provide for capitalisation on maturity of the instalment.
In this regard, we invite you to watch this video on anatocism in French-style mortgages, with particular reference to the Taranto Court's ruling of April 2022.
Remember that the professionals of the Studio Cappuccio are able to realise a careful analysis on mortgages where cases of anatocism and usury are suspected.
Some rulings on loans with French-style amortisation
In this paragraph we will give you some judgments on French amortisation mortgages. You will then be able to see for yourself what we are talking about.
RG 2188/2021 - Court of Rome of 8/2/2021 (Judge Basile) on French mortgage compounding cap
RG 42319/2015 Court of Rome of 11.5.2021 (Judge Centofanti) on current account and French mortgage
Consequences in the event of a finding of vagueness
If vagueness is found in the loan agreement then the loan must be recalculated pursuant to Art. 117 TUB, which states:
4. Agreements shall state the interest rate and any other prices and conditions charged, including, for credit agreements, any higher charges in the event of delay...
7. In the event of non-compliance with para. 4 and in the cases of nullity indicated in para. 6, the following shall apply:
- (a) the minimum nominal rate and the maximum nominal rate, for lending and borrowing transactions respectively, of annual Treasury bills or other similar securities as may be specified by the Minister for the Economy and Finance, issued in the twelve months preceding the conclusion of the contract or, if more favourable to the customer, issued in the twelve months preceding the performance of the transaction
- (b) the other prices and conditions advertised for the corresponding categories of transactions and services at the time of the conclusion of the contract or, if more favourable to the customer, at the time when the transaction is effected or the service is rendered; in the absence of advertising nothing shall be due...".
The loan must therefore be recalculated at a much lower ratewith a net saving for the customer.
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