The annual percentage rate of charge (APR) on home loans: calculation, verification and disputes

The Annual Percentage Rate, better known by its French acronym TAEG, is a key element of any mortgage offer. It represents the total cost of the loan to the borrower, expressed as an annual percentage of the amount borrowed. Understanding its composition, knowing how to check it and knowing what recourse is available in the event of an error is fundamental for any borrower wishing to make an informed commitment. This standardised indicator makes it possible to compare different loan offers on a uniform basis, going beyond the simple nominal interest rate. Lenders are legally obliged to determine the interest rate correctly, to ensure that the transaction is transparent.

Definition and composition of APR

The purpose of the APR is to reflect the real cost of credit to the borrower. It is not limited solely to bank interest (the nominal rate), but also includes a significant proportion of the ancillary costs associated with granting the loan.

The elements included in the calculation

In accordance with articles L. 314-1 et seq. of the French Consumer Code, the calculation of the APR must include all the costs involved in obtaining the credit on the terms and conditions stated. This typically includes :

• Bank interest calculated on the basis of the nominal rate of the loan.
• Application fees fees: charged by the bank for researching and arranging the finance.
• Fees paid or due to intermediaries If you go through a mortgage broker, for example, and the broker's remuneration is a condition of the loan being granted by the bank.
• The cost of compulsory insurance and guarantees :
  • Borrower's insurance (death and disability) if required by the bank to grant the loan. The cost taken into account is that of the insurance chosen, whether it is the bank's group contract or an external insurance delegation.
  • The cost of securing the loan (mortgage, lender's lien, guarantee by a specialist organisation).
• Fees for opening and maintaining a specific account if the account must be opened and maintained in order to obtain credit.
• The cost of valuing the property if this valuation is required by the lender (excluding registration fees relating to the transfer of ownership).

This list, set out in article R. 314-4 of the French Consumer Code, is designed to provide a complete overview of the expenses that are a condition for obtaining financing.

Items excluded from the calculation

Certain costs, although related to the overall property transaction, are not included in the calculation of the APR. In particular, article R. 314-5 of the French Consumer Code excludes :

• Costs associated with the acquisition of the property These include transfer taxes (often mistakenly referred to as "notaire's fees") and related taxes.
• Notarial fees Costs associated with drawing up the deed of sale and any mortgage guarantee.
• Costs to be borne by the borrower in the event of non-compliance with its obligations late payment penalties, collection costs, etc.
• The cost of insurance or optional cover not required by the lender to grant credit.

It is therefore important to distinguish between the costs directly linked to obtaining the loan (included in the APR) and those linked to the property purchase itself (excluded from the APR).

The lender's obligations to provide information on the APR

The law requires the lender to provide clear and precise information about the APR from the pre-contractual stage onwards.

• Advertising Any advertisement containing an interest rate or figures relating to the cost of credit must state the APR (article L. 313-4 of the French Consumer Code).
• European Standardised Information Sheet (ESIS) Article L. 313-7: This document, which must be submitted before the loan offer is made, must state the APR and give details of the factors taken into account in its calculation.
• Loan offer The written offer, formalised in accordance with article L. 313-25, must state the APR and the total cost of credit.

These obligations are designed to enable borrowers to compare offers effectively and understand the real financial commitment. The regulations resulting from the transposition of the 2014 European Directive, applicable since 2016, have strengthened these requirements. For an overview of the changes brought about by this reform, you can consult our complete guide to mortgages post-reform 2016.

Checking the APR

Despite the strict legal framework, errors in calculating APR can occur. It is useful for borrowers to know how to recognise these and what the most common errors are.

Common mistakes

The most common errors in APR calculations made by lending institutions include :

• Omission of certain compulsory charges For example, you may forget to include the costs of guarantees (deposit, mortgage), the cost of compulsory borrower's insurance, the brokerage fees that are a condition of the loan, or the costs of maintaining a compulsory account.
• An incorrect calculation method :
  • Error in the basis for calculating the calendar year (the "Lombard" year of 360 days is prohibited, the calculation must be based on 365 or 366 days).
  • Incorrect application of the mathematical actuarial calculation formula defined by the Consumer Code.
  • Incorrect calculation of periods (monthly instalments, quarterly instalments, etc.).
• Incorrect rate rounding The APR must be calculated with sufficient precision, and excessive rounding can hide the fact that the usury rate has been exceeded or distort the comparison.
• Mandatory subscription of shares not taken into account In some mutual establishments, subscribing to shares may be a condition for granting a loan and must therefore be included if it generates a cost for the borrower.

These errors, whether intentional or not, can have significant financial consequences for the borrower.

How can the borrower suspect an error?

It is not always easy for a non-professional to spot an error in the APR. However, there are some warning signs:

• A significant difference between the nominal rate and the advertised APR If the APR appears to be very close to the nominal rate, but the loan administration, insurance and guarantee fees are mentioned, this may indicate an omission.
• Mention of compulsory charges in the general or special terms and conditions that do not appear to be reflected in the APR.
• Comparison with other offers If an offer has a significantly lower APR than competing offers for a similar nominal rate, a check may be useful (or conversely, an abnormally high APR).
• Using a 360-day year Although less common nowadays, checking the basis for calculating the year can be relevant.

If you have serious doubts, it is advisable to have the loan offer or contract analysed by an expert or a lawyer. An in-depth mathematical and legal analysis can confirm or rule out the presence of an error.

Disputes relating to incorrect APRs

If an error in APR is found to exist, the borrower has a number of remedies available to assert his or her rights. Litigation in this area is mainly aimed at punishing the lender at fault.

Penalties applicable

The main civil penalty for an incorrect APR or one that is omitted from the loan offer is the forfeiture of interest for the lender. This penalty is set out in article L. 341-48 of the Consumer Code (for contracts entered into after 1 July 2016, and similar provisions applied previously).

• Type of penalty Forfeiture: Forfeiture means that the lender loses the right to receive the contractual interest provided for in the contract. The borrower will then only be obliged to repay the capital borrowed, according to the schedule originally agreed.
• Scope of the penalty The judge has discretionary powers. He may declare the disqualification total or partial of the interest. The law stipulates that the judge will set this proportion "having regard in particular to the loss suffered by the borrower". This means that a minor error will not necessarily result in total forfeiture.
• Practical consequences If the loan is declared cancelled, the sums already paid by the borrower in contractual interest must be refunded or deducted from the outstanding capital. This can represent considerable savings for the borrower, particularly on long-term loans.
• Historical alternative (old contracts) For some very old contracts, the courts have ruled that the interest stipulation is null and void, resulting in the substitution of the legal interest rate (which is often less advantageous than total forfeiture). However, forfeiture is the penalty now clearly established by recent legislation for APR errors.

It is possible to envisage penalties for breaches by the lender in a broader sense, the wrong APR being one of the possible faults.

Time limits for taking action

Legal action to have an incorrect APR penalised is subject to a limitation period.

• Limitation period The borrower's action is time-barred by five years (article 2224 of the French Civil Code).
• Starting point of the period This is the most debated point. The majority of jurisprudence considers that the period runs from the day on which the borrower has known or should have known the error affecting the APR.
  • If the error can be detected simply by reading the loan offer (for example, an obvious contradiction or the omission of a charge mentioned elsewhere in the document), the time limit runs from the time the contract is concluded.
  • If the error requires a more complex analysis (mathematical calculations, verification of the costs actually included), the starting point may be postponed until the day on which the borrower became aware of the error, for example following an analysis of the contract by a professional.

The precise determination of the starting point is essential and depends on the circumstances of each case. It is therefore advisable to act quickly once you suspect an error, in order to safeguard your rights.

The APR is much more than just a percentage. It is an essential tool for transparency and protection for borrowers when it comes to home loans. The lender is obliged to calculate it rigorously, and the borrower can benefit from checking it. In the event of a proven error, the penalties can be significant, underlining the importance of an accurate APR for the validity and balance of the loan contract.

If you have any doubts about the APR on your home loan or would like an in-depth analysis of your contract, please do not hesitate to contact our law firm.

Sources

• Consumer Code: Articles L. 313-1 et seq. (scope), L. 314-1 to L. 314-5 (definition and calculation of APR), L. 313-7 (FISE), L. 313-25 (content of the offer), L. 341-48 (penalty for forfeiture of interest).
• Civil Code: Article 2224 (ordinary law limitation period).
• Order no. 2016-351 of 25 March 2016 on consumer credit agreements relating to immovable property for residential use.
• Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to immovable property for residential use.