Did the parties know what they were signing?
The problem of Swiss franc borrowers with the repayment of currency credits often ends with a court battle. And on such occasions, we learn that Poles neither read credit agreements nor understand their provisions. Sometimes it happens that it is the banks fault that the content was wrongly formulated, which in extreme cases led to the canceling such agreements by the court.
Let's systematize our knowledge about loans and credits. Loans can be granted by any owner of money. Conventionally these are banks, loan institutions, business entities, but also natural person (individuals). The loan agreement does not have to be in writing, although it should be in the case of amounts higher than PLN 500. The amount of the loan until the total repayment is the property of the borrower, and the „cost of debt” is usually interest and/or commission. Sometimes, when a loan is taken, a deadline for repayment is not determined, and there is also no interest and no commission (for loans granted by individuals to other individuals). On the other hand, a loan can be very expensive, although the interest rate itself is limited by anti-usury regulations. There are significantly more formal restrictions on credits: they can only be granted by banks and credit unions, the repayment deadline must always be determined and the agreement drawn up in writing. Credit capital is only available to the borrower (being owned by the bank), and repayment is always related to interest payments and most often also to commissions or other additional costs (e.g. property insurance). The credit agreement must meet the requirements of the banking law.
Profit and loss account
Over the years, currency credits have brought benefits to each party. Borrowers were paying lower installments compared to credits in PLN, currency credits were widely available in most banks, and the Swiss franc seemed to be a currency resistant to high volatility. Banks reached a wide group of customers offering theoretically cheaper form of crediting, earning between 2000-2015 about 13 billion PLN only on interests. The change in the market rules of the game has radically altered this picture, and the final bill has so far not been known and is little dependent on the parties involved.
Depending on the currency in which we borrow, the base interest rate to which the banks add a margin is different. For credits denominated in PLN the base rate is determined by WIBOR (usually 3 months, denoted as WIBOR 3M). In a nutshell, the WIBOR (Warsaw Interbank Offered Rate) is an average interest rate on credits that the largest domestic banks lend to other banks. London Interbank Offered Rate (LIBOR) is quoted on several currencies: USD, EUR, CHF, GBP, JPY. For the Swiss franc credit, the calculation of the total interest rate based on the LIBOR rate was recorded in the credit agreement, taking into account changes in this rate in time. Any significant change in the base rate resulted in a recalculation of the amount of installments repaid by the borrower. What's interesting, base rates may take negative values, which is mainly due to the practice of lowering interest rates by central banks to prevent economic problems. This was also the case with the LIBOR rate for the Swiss franc. For the Polish „frank men” it was important that (after some initial resistance) the banks decided to take into account the negative LIBOR in the installment calculations, which partially lowered their height.
Who wants a low margin, who?
When choosing a mortgage credit, it is important to pay special attention to the amount of the bank's margin, as it is an element that the bank can adjust to the borrower (while the base rate is constant). It is worth looking for promotional conditions because the game is worth the candles. Apparently, the insignificant difference in the margin of 0.5% for a 30-year mortgage credit can save you some tens of thousands of PLN. Low margins (rarely above 1-1.5%), together with the very low LIBOR (low in comparison to WIBOR), guaranteed a popularity of Swiss franc credits years ago.
We already know what the base rate is, let's find out what is the bank's margin. Contrary to the commission with which it is often confused, it is not paid once, but is a component of total interest rate that affects the amount of credit installments throughout the debt repayment period. What does the bank's margin level depend on? Primarily on the bank and its preferences and the way the risk is calculated. There are at least several factors that banks take into account when setting a margin. It is for example a type of credit - mortgage credits by nature are less risky (and e.g. better secured) from cash credits or investment credits, hence their margin is lower. Large own contribution also lowers the margin, the same as the amount of the credit - it is known that for banks the „bigger” customer is a better customer, and that bank would appreciate him. Let's add to that the individual borrower's assessment is also made, including the professional situation (form of employment, income level, education), family situation (number of dependants, the contribution of another family member to home budget) and financial status (if the borrower has other financial obligations). Banks may use all listed above, selected, or yet different criteria under which they calculate the margin, and therefore the whole interest rate. And probably equally important - the bank's margin is most often fixed and guaranteed in the credit agreement - deviations from this rule are rare.
Take a credit in the currency in which you make a living
This maxim, repeated by the part of economists, has not bothered the consciousness of those who want to finance their four corners as cheaply as possible. Unfortunately, the need to exchange the money transferred monthly by the employer (in our case - PLN) e.g. to Swiss franc - no matter, through a bank or exchange office - makes that at the time of credit taking we should take into account the risk of exchange rate fluctuations. Otherwise, throughout the repayment period, you will need to follow the francs quotations nervously, and these can change radically - from the „heavenly” level of 1.9542 Polish zloty for 1 franc on 31.07.2008 to „hellish” 5.1934 on Black Thursday (15.01.2015).
Exchange rate is the amount of one currency for which you can buy a unit of another currency, that is the price of a given currency in another currency. There are many types of exchange rates, but according to the classical division we have: fixed exchange rates (state-defined), liquid exchange rates (shaped by market demand and supply equilibrium) and mixed exchange rates (determined partly by the market and partly by the state). Currency exchange rates are influenced by various factors, including the supply of foreign currencies and the demand for them, the monetary policy, the level of interest rates, the economic situation of countries (including the rating agencies of the major credit rating agencies), political conditions or even the actions of individual investors (the famous speculative attack by George Soros on the British pound in 1992). There are currencies recognized as so called „safe heaven”, ie low risk and high liquidity financial instruments, just for the times of crisis. In general, these types of currencies are currencies of Japan, Switzerland and the United States, that is JPY, CHF and USD.
Refund of spreads as a chance for borrowers
Taking into account the entire repayment period of the credit, on the currency conversion mechanism the bank could gain and the borrower could lose even tens of thousands of PLN. The Presidential Bill of August 2016 assumed a refund of the substantial part of amounts that the banks earned on spreads both at the time of credit taking and its repayment. The average bid and ask exchange rates used by the National Bank of Poland (NBP) were indicated as the benchmark and the way of assessing the potential excessive revenues of banks. The refund of the calculated surplus was supposed to be made not in cash but treated as an overpayment of the credit. The total estimated cost for the banking sector should not exceed PLN 4 billion.
Currency spreads, also known as bank spreads, are for foreign currency credits additional income for the bank and additional costs for borrowers. The mechanism is simple - paying the amount of credit to the borrower and then collecting the monthly installments, the banks convert PLN into another currency. And they work as exchange offices, selling the currency by a certain percentage more expensive than buying it. Spread levels vary between banks and may also be different for different currencies. In the past it turned out that the value of spreads reached a dozen percent. In 2009, the provisions of Recommendation S (II) regarding spreads came into force. The banks were obliged to conduct a reliable information policy on the principles of the currency spread and its impact on the cost of credit before concluding the credit agreement and during its repayment. Banks had to publish the rates on which the credit installments were converted and their customers were able to repay the installments in foreign currency bought, for example, in exchange offices.
Was credit in Swiss franc a bad choice?
The analyst of bankier.pl, M. Kisiel, in the text „Is credit in the franc a bad choice?”, shows a negative impact of exchange rate changes, among others, to the amount of the debt left to repay. He analyzes credit in CHF for PLN 350.000, taken in February 2008 („in the hole” for the Swiss franc) for 30 years at market levels of LIBOR and bank margins. The exchange rate of the franc was then PLN 2.24. At the time of writing, the rate was already PLN 4.24. As a result, the value of the credit taken 7 years before, instead of falling, rose to over PLN 530.000, ie over PLN 180.000.
In Poland, as a result of the problem of so-called „franc's credits”, has raised many misunderstandings even as to the definition of foreign currency credits. Many believe that some types of foreign currency credits (so-called indexed credits, dominant in Poland among franc credits) are in fact not currency credits. Because so-called „franc men” only get the first, non-final court verdicts relating to, among others, this issue, we will use here a broad definition of foreign currency credit, applied by the NBP. By the concept of currency credits we mean all types of credits which have, in economic terms, features of currency credits, ie indexed credits, denominated credits and credits paid and repaid directly in foreign currency. It is crucial to distinguish between indexed credits and denominated credits. An indexed foreign currency credit is a credit in which you have a credit amount written in PLN in the credit decision and in the credit agreement. Only when the credit is paid by the bank (whole or in tranches), the amount expressed in PLN is converted into the amount expressed in foreign currency at the current exchange rate. Denominated credit is a type of credit where you know how much money you will get in foreign currency. This is stated in both the decision and the credit agreement. The payment is made in PLN according to the current exchange rate. The common feature of both types of credits is that their interest rate is based on the rate of the given country (e.g. EUR or CHF), and that in both cases you must pay attention to so-called spreads.
Black Thursday (2015)
There are sudden situations in the financial markets which cause panic among its participants. This was on January 15th, 2015, when the Swiss National Bank unexpectedly unleashed a EUR/CHF exchange rate, which has so far been maintained at a fixed level of 1.2. This caused a huge panic in the markets. In Poland, the exchange rate of the Swiss franc against the Polish zloty rose from 3.54 (January 14th, 2014) to 4.32 (January 15th, 2015), which was close to 22%, though at the peak even amounted to 5.19. In the following weeks it weakened significantly. Today (June 27th, 2017) the CHF / PLN exchange rate is 3.86, which is almost 11% lower than the closing price on January 25th, 2015, and is almost at the lowest level since then. The Swiss franc charts for any period can be analyzed, among others, on the site http://kursy-walut-wykresy.mybank.pl/
When you consider conversion your credit into PLN you should count all costs associated with it. First of all, if you decide to convert the credit at a high level of foreign exchange rate (and usually in such situations, taken with fear, we decide on such solutions), higher than the rate at which you took out the credit, you have an additional debt. The value of your liability due to the bank will now be higher. Secondly, remember that some banks, although this is rare, may still use a currency conversion fee. Thirdly, you must pay the cost of court fees due to the change in the land and mortgage register (due to currency change in the mortgage). Probably your creditworthiness will be re-tested, you will need to re-submit income statements that may have changed since the original credit decision. Worsening of your financial situation may raise the cost of the converted currency credit. Despite the fact that in Poland there is a so-called. „anti-spread act”, you could forget that the bank, by converting your credit, for example CHF to PLN, will calculate the outstanding balance in PLN, using the selling rate, while the bank put at your disposal the amount of credit, converting it from CHF into PLN using purchase rate. Do not forget that credits in PLN are always more expensive than in CHF because of differences in base rates applied to each type of credit (e.g. on June 26th, 2017, WIBOR 3M is 1.73, while LIBOR 3M for CHF is negative -0.73). In the end, remember that the margin for Polish zloty credits may be higher than those for Swiss franc, which will additionally increase the cost of your credit after currency conversion.
Help or not
The vast majority of Poles (59%) claim that the state should not help those who have taken mortgage credits in Swiss francs - according to an IBRIS survey conducted by a representative group of respondents at the request of the Grabski Center. 43% of those, who declared that they allow help, would like it to be based on the individual decisions of the banks about the aid scheme.Source: Report, Swiss franc credits. Situation analysis and recommendations, Grabski Center, April 2016.
As of today (July, 2017) „there are three draft bills in the Polish Sejm concerning the problem of Swiss franc credits, by the Chancellery of the President, the PO parliamentary club and the club Kukiz'15 parliamentary club. A special subcommittee was set up to analyze this issue and propose a legislative solution. The most likely to enter into force is the presidential bill, which would entail high costs (9.3 billion PLN according to the KNF calculations from March, 2017) and would lead to a number of legal and economic consequences. The bill raises controversy over compliance with the Polish Constitution. Adoption of the „anti-spread” law would be a precedent in terms of state interference in the area of contractual civil-law relations and would provide the basis for future formulation of „borrowers in PLN”claims when interest rates rise. In addition, it should be noted that this act imposes additional costs of the banking sector, which would cause economic slowdown and complicate implementation of so-called Morawiecki Plan”.Source: Report, Swiss franc credits. Situation analysis and recommendations, Grabski Center, April 2016.
According to the NBP's estimates (February 2016), the implementation of a fair exchange rate would be a cost for the banking sector at the level of 38 to 44 billion PLN. On the other hand, the Polish Financial Supervision Authority (KNF) calculated in March 2016 that the banking sector would have to cover losses of 66.9 billion PLN, resulting from the introduction of a fair exchange rate.Source: http://wiadomosci.onet.pl/ustawa-frankowa-nbp-policzyl-koszt-propozycji-dudy/ltlfcj The KNF, the presidential financial bill can lead to financial crisis, http://www.bankier.pl/wiadomosc/KNF-prezydencki-projekt-ustawy-frankowej-moze-prowadzic-do-kryzysu-finansowego-3499822.html
To understand the assumptions of the fair exchange rate it is worth to visit the website of the Chancellery of the President, where you can find an Excel file which could be edited to set a fair exchange rate: http://www.prezydent.pl/kancelaria/aktywnosc-ministrow/art,187,kredyty-walutowe-beda-przeliczane-po-tzw-kursie-sprawiedliwym.html A friendly fair exchange rate calculator is also included in the Puls Biznesu blogosphere: http://dyskusja.biz/dodatki/kalkulator-kursu-sprawiedliwego
Today (July 2017) we have the lowest NBP interest rates since 1989. The level of base rate for credits in PLN, ie WIBOR, directly depends on their height. Usually it is around the NBP reference rate. The level of central bank interest rates changes along with changes in the economy, mainly changes in inflation and economic growth. Today's record low installments of mortgage credits in Polish zloty will not last forever. WIBOR 3M is today around 1.7%. Five years ago, it was around 5% and a customer with a credit of 250 000 PLN for 30 years paid a payment of about 1700 PLN. 15 years ago the value of 3M WIBOR was already 10%, which raised the amount of installments, exceeding 2600 PLN. The increase in interest rates, and in consequence also the installments of credits in PLN is unavoidable.Interesting consideration on credits based on fixed and variable interest rates can be found in: M. Kisiel, Mortgage credit with fixed rate - would anyone be interested?, bankier.pl
The vast majority of Polish zloty mortgage credits granted in Poland are credits with variable rate. This means that the interest rate of such credits is determined by the sum of the base rate (WIBOR) and the margin of the bank. The WIBOR rate changes daily. As a result, periodically (e.g. quarterly) the interest rate is adjusted, and consequently, the amount of installments changes. Fixed rate mortgage credits are not popular in Poland. So far, they are mainly granted for a short period of time (usually 2 to 5 years). They are also more expensive than variable rate credits. The higher interest rate is an additional revenues for the bank to take over from the borrower the risk of interest rate changes over time. According to M. Kisiel in the aforementioned article, one of the banks operating in Poland offers fixed interest rate credit for 5 years at a rate of 4.5% per annum.
Currency credits in Spain
Court battles in disputes between borrowers in foreign currency and banks may lead to unexpected results, not only in Poland. The Supreme Court of Spain in July 2015 ruled in one of the cases that a foreign currency mortgage is a financial instrument that should be offered to clients in the same way as, for example, investment in an investment fund, ie by examining the borrower's investment profile. The Court did not agree, however, that such an interpretation is a sufficient basis for canceling the entire credit agreement.
According to the generally accepted definition, a foreign currency credit is a credit whose parameters (amount of credit, installment) are determined in a selected foreign currency but both tranches paid by the bank and installments repaid by the borrower are converted and regulated in the Polish currency according to the current exchange rate. For some time in the media there have been discussions about whether foreign currency credits are actually credits. And if not credits, then what? According to some, the fact that repayment of capital does not directly reduce it (as a result of exchange rate changes) makes it something like a hybrid combining a typical credit with a foreign exchange investment. Others go even further by specifying currency credits as a type of currency option, that is a derivative. The value of this type of instruments depends on the value of other instruments, in the case of foreign currency credit - on the exchange rate. And if so, the borrowers should be tested for their vulnerability and if their risk aversion is high, they should hear that such a credit is not for them. All of the above considerations have one goal - to make a possible cancellation of credit agreements.
Credits qualitatively better
Since 2000 the banks have granted a total of 775.000 credits in Swiss franc (CHF), of which 210.000, ie almost 30%, have already been paid. Mortgage credits granted in CHF have the best repayment ratio. It currently stands at 97.4%.Source: ZBP, About francs and banks, www.zbp.pl
As with any credit, interest and commissions are just part of all the cost of a mortgage. Additional costs characterizing a mortgage credits include e.g. fees related to hedging of bank risk. The basic mortgage credit is secured by the mortgage. Making a mortgage entry in the land and mortgage register, despite the digitization of mortgage courts, can last from a few weeks to several months. Banks for this period are hedging, requiring „bridge insurance”, ie. credit insurance until the establishment of a mortgage. Such credit insurance usually involves a temporary increase in the margin charged by the bank, e.g. by 1 p.p. The property must be covered by property insurance. Previously, property valuer must assess its value and get his payment, which is the cost for us. Apart from property insurance, bank often requires a life insurance for borrowers. With a credit of PLN 300 000, the monthly total premium for both insurance (property and personal) can raise the credit installment by approximately PLN 70-150.