Rising interest rates and loan instalments mean that more and more customers are switching to the repayment model with a fixed interest rate. Polish regulations mean that borrowers get a chance for cheaper loans in the future.
For if the rates start to fall in a few years, they will be able to repay the loan with a fixed rate without a commission and take out a new one with a lower interest rate. Banks are afraid of mass early repayment of such loans, because it would mean significant losses due to the maintenance of large collateral.
From July 2021, thanks to the amendment to Recommendations issued by the Polish Financial Supervision Authority and regulating the housing loan market, each bank must offer fixed-rate mortgages.
The industry must also allow those customers who already have a loan with a variable interest rate (and we have almost 98 percent of such loans) to switch to a fixed rate.
Banks in Poland afraid to charge fees?
More and more often clients who have been repaying their housing loans for years, banks are proposing to switch to a fixed interest rate (to be precise: periodically fixed rate, because it mainly concerns “freezing” rates and instalments for five or seven years).
The information from banks shows that there is a lot of interest and more and more clients decide to take such a step. No wonder, since WIBOR rates (they are the basis for mortgage rates in Poland and the amount of instalments) are strongly growing due to interest rate increases by the Monetary Policy Councilthat are supposed to curb inflation.
3M WIBOR may reach 6 percent
3M WIBOR from September 2021 to the beginning of April 2022 increased from slightly more than 0.2 percent. up to 4.8 percent. Futures contracts indicate that in six months it may reach 6 percent. If this happens, the total interest rate on the average home loan will then jump to 8%.
Out of eight Polish banks that have divided almost the entire mortgage market in our country among themselves , only one informed us that they charge a commission for early repayment of the entire fixed-rate housing loan.
No fees are declared by: PKO BP, Pekao, Santander, mBank, ING Bank Śląski, Millennium and BNP Paribas. Only Alior replied that if less than three years have passed since the loan was granted, in the event of early repayment, it will collect “compensation in the amount of interest that would be charged to the entire or part of the loan repaid early within one year from the date of actual repayment”, but no more than 3 percent capital repaid.
Interest is calculated on the basis of the interest rate on the actual repayment date.
BNP Paribas informs that according to the current offer, it does not charge a commission for early repayment of mortgage with a fixed interest rate.
“It is worth noting, however, that prepayments in the event of a significant drop in interest rates are a very big risk for the bank and there are no instruments in the zloty on the market that could fully cover such a risk” , says Marcin Grabiszewski, product owner at BNP Paribas Bank.
It is worth noting that in the case of a housing loan with a fixed interest rate, the client can repay it ahead of time without any commission (no matter how much time has passed since signing the contract) . For comparison, in the case of a floating rate mortgage, banks cannot charge a commission if at least three years have passed since the loan was granted.
Problem with early repayment of a fixed-rate mortgage
Pursuant to Art. 40 sec. 1 of the Act of 23 March 2017 on the mortgage loan and supervision over mortgage brokers and agents (Act on the mortgage loan), the parties may stipulate in the agreement on a mortgage loan with a fixed rate, the so-called compensation in the event of repayment of all or part of the loan before the date specified in the contract. The compensation may not, however, be higher than the lender’s costs directly related to early repayment (Article 40 (7) of the Mortgage Act).
Certainly, in the next at least two years, interest rates in Poland will remain at an elevated level, but later the economy should start to cool down and inflation should slow down, which will result in the emergence of expectations of interest rate cuts.
This can be seen by customers who currently take out fixed-rate mortgages (or are switching to such contracts with a variable rate), and many of them may want to repay the loan ahead of time to take out a new one, already with a lower interest rate .
“Most mortgages in Poland are granted with the participation of intermediaries. When they notice that there are expectations of a drop in interest rates, they will start persuading customers to pay off early and take out a new loan.
It will probably pay off for your customers, so don’t be surprised at their decisions. The scale of this phenomenon may be large, which will mean significant losses for banks”, says one banker who wants to remain anonymous.
Commission for early repayment of a fixed interest loan?
“In our opinion, the provision in the act that the compensation may not be higher than the bank’s costs directly related to early repayment is very imprecise and raises such doubts that almost all banks give up charging this fee.
And this despite the fact that the act allows for its collection” adds another representative of the banking sector.
Banks, when granting mortgages with fixed interest rates, must hedge the interest rate risk and they do so with IRS (interest rate swap) instruments, but this security covers many loans worth even several hundred million zlotys in total.
If the customer repays the equal-interest loan early, the bank should close the collateral, but cannot close the entire single IRS contract because it is large and secures thousands of loans. Therefore, bankers argue that it is difficult to precisely calculate the cost of a bank on a single, early repaid, equal-interest rate loan .
“Nobody wants to introduce a fee that would be questioned by the courts, UOKiK or the Polish Financial Supervision Authority. This is a big problem for the sector, and in our opinion it requires consultation with the supervision and the legislator.
Commissions for early repayment of fixed-rate mortgages are charged by banks in other European countries, e.g. in Germany”, an interlocutor points out.
Much depends on what will happen with interest rates, but it is certain that one day they will start to fall. The problem will become apparent in a year or two at the earliest.
“If we grant a loan at the rates as it is today, e.g. the WIBOR 3M rate reaching 4.8%, and in two years the rates will drop significantly and customers will repay the loan in full, we will record a significant loss on this. It will be greater, the higher the loan, the more the rates fall and the earlier it has been repaid” says one of the bankers.
According to our information, some banks are working on such an early repayment fee for a fixed-rate mortgage so that it is not questioned. “There is no one-size-fits-all amount to be repaid by customers.
Much depends on the change in interest rates and the timing of repayment. It is certainly difficult to construct a formula indicating the amount of the commission that is precise, not undermined by regulators and at the same time understandable for the client”, adds the interlocutor. For now, the banks do not want to disclose, even unofficially, how many percent of the commission customers would have to pay for the early repayment of the fixed-rate mortgage.
Early mortgage repayment may be charged by the bank
In the opinion of the Polish Financial Supervision Authority, the lack of compensation (commission) by banks is worthy of approval and the KNF Office treats it as an element of making the offer more attractive to the client.
However, the situation is not that simple. Our information shows that some banks are trying to measure the risk of prepayments and it is reflected in a slightly higher margin on fixed-interest loans.
Thus, if the problem with the valuation of the cost incurred by the bank in the event of early repayment of such a loan were resolved, then the industry could slightly reduce the margin and make the financial terms of a fixed-rate loan more attractive compared to a variable (the latter were usually cheaper, but a lot depends on the expectations regarding the level of market rates). interest).
According to the KNF Office, the fee is regulated by the law and the EU directive, and collecting it in accordance with the law does not pose any legal risk.
“The amount of the compensation should be presented to the borrower at the time of incurring the liability with the bank (simulation) and at the time of submitting the application for early repayment (partial or full) of the loan (exact amount)” – points out the KNF Office. The customer should also find out how this fee is calculated.
The authority states that the fee should be “reasonable”, “fair and objective” and should cover potential costs “directly related to early repayment”. Nor can it be greater than the lender’s financial loss or act as a punishment.
Importantly, the compensation does not include the bank’s lost hypothetical benefits due to the inability to reinvest interest at the same rate as under the loan agreement.