Hard Currency
The turbulent currency market is making waves on the Polish mortgage market. The euro, dollar, and the Swiss franc all jumped in value against the złoty at the end of September, the latter by zł.0.60. Many home-buyers went straight to their banks and considered changing the denomination of their mortgages from Swiss francs to Polish złoty, but mortgage and finance experts say there is no need to worry.
"The złoty has slightly weakened recently; still, this is not a reason to panic. It is expected that the złoty will strengthen in the nearest future, so changing the mortgage denomination would be a mistake," says Maciej Kossowski from financial-advice company Expander. He also stressed that the strengthening of the dollar only translates into current monthly payments, and not to the total value of the loan.
"The currency fluctuations are not that big and this is not a good reason to change the denomination, especially as the operation is quite an expensive one," says Marek Węgrzanowski, an expert with the WGI Group. Indeed, the costs a client has to pay when changing the denomination of a mortgage include a commission charged by the bank for the transaction. What is more, when converting the denomination from Swiss francs to złoty one has to expect a higher interest rate.
Expensive changes
Even assuming the most pessimistic scenario, i.e. that the złoty will continue to weaken significantly and will not regain its value, it is still probably not worth switching a mortgage into this currency. Experts say that it is too late for such a move, especially seeing as the changeover can take two weeks. Bank will have to verify the consumer's loan capacity, which requires providing documents proving the person's regular income. Moreover, banks often linger over a deal on purpose to finalize the transaction at a moment that is most profitable for them.
This is not the first time that currency changes have thrown the market into turmoil. At the beginning of last year, the euro increased to almost zł.5 and the Swiss franc to zł.3.10. At that time the złoty made up the loss, falling below the level of zł.4 against the euro.
Gimme złoty
Rather than move away from the złoty, many homeowners might be better off getting into it. Węgrzanowski says that it is only worth considering changing a mortgage's denomination if the customer took a mortgage in a foreign currency, especially in dollars, a few years ago, as the złoty is now getting significantly stronger. "If we are absolutely sure that we have already earned on the mortgage, we can convert the denomination for peace of mind," he says.
At the moment, the experts' advice is not clear-cut when it comes to deciding on a type of mortgage. Taking a home loan in Swiss francs is tempting, as its interest is approximately 2.5 percent compared to 5.5 percent in the case of mortgages in Polish złoty.
Whether a foreign currency mortgage is profitable should always be analyzed in comparison with the mortgage in złoty. If a monthly payment has risen from zł.600 to zł.700, one has to ask how is the amount related to the monthly payment of a similar mortgage in the home currency. Usually, it is still lower. "With the current difference between the interests of francs and złoty, only the appreciation of the Swiss currency to the level of zł.3.30 would balance the savings on the monthly payments," says Kossowski.
Future trends
The decision on the mortgage denomination can be based on either of two factors, Kossowski says. "For today, assuming that interest rates do not change, it will be better to take a mortgage in francs, especially that, according to analysts, the złoty will get stronger." However, analysts also signal that the future trend will involve a decrease of interest rates in Poland accompanied by growing interest rates in the US, the eurozone, and Switzerland. This means that mortgages in those currencies will be more expensive.
Which factor to watch then, interest rates or the currency strength? "It is better to observe the interest rates, as currency fluctuations are much less predictable," says Kossowski. Additionally, experts warn that in the case of high currency risk, it is always better to take a mortgage in the same currency as the one in which you earn in.
At the moment some 60 percent of new mortgages are taken in Swiss francs. In spring last year it was even 80 percent. All the big players on the mortgage market, such as PKO BP and BPH, include foreign currency mortgages in their offer. Some banks, however, are withdrawing from this market. ING Bank lšski resigned from offering mortgages in Swiss francs last year. "Our bank does not want to put its customers at risk. Złoty is safe and besides the interest on mortgages in this currency is lower and lower," said a spokesman with ING Bank lšski, Piotr Utrata.
The best deals
According to Expander, the cheapest mortgages denominated in złoty are offered by BZ WBK, ING Bank lšski, and BPH. The most advantageous mortgages in złoty are those offered by BPH, GE Money Bank and Nordea Bank Polska.
At the end of August the value of all mortgages taken by individuals was zł.41 billion, which was a 32-percent growth on the period between January and August 2004. "Eighty percent of the current total value of mortgages was taken in the last three years," says Kossowski.
In Poland the value of mortgages constitutes five percent of the country's GDP. This is very little especially if compared to other European countries, where the loans are 40 to 80 percent of GDP.
The pros and cons of złoty loans
Pros
• Loan margins have fallen to one percent and will not change after Poland enters the eurozone. As a result the Polish mortgage loan will be one of the cheapest in the eurozone
• Assuming that after eight to 10 years properties are sold, loans are paid off and new ones are taken to buy a bigger house/flat, the interest in relation to the capital decreases along with an increase of the exchange-rate risk
• Interest rates in Switzerland are low but the Swiss central bank predicts an inflation-rate change from the current one to 2.5 percent in 2006, which will increase interest rates
• ING Bank Śląski's analyses prove that 90 percent of loan takers change the currency immediately after a huge increase of the exchange rate while loan profitability should be calculated in relation to a loan in the złoty
• Interest on foreign-currency loans is fairly higher than that given by banks for złoty, as the loan payment is at the currency-purchase rate, whereas the repayment is at the currency-sale rate
Cons
• Loan margins in Swiss francs are systematically falling and banks are offering lower loan interest of 1.9 percent
• The macroeconomic situation of Poland is good but interest rates are still high, and an influx of foreign investments will strengthen the złoty
• The central bank is independent and does not change interest rates. The government's calls for their change might bring opposite effects
• When the euro and złoty ratio is stabilized, according to the ERM II mechanism before Poland joins the eurozone, the exchange-rate risk will decrease
• Banks offering cheap złoty loans use so-called variability indices, which do not change rates within a given period of time even if the central bank lowers them by up to 0.25 percent
• Lower installments (in relation to a złoty loan) enable investments that at least partially protect against the exchange-rate risk
