Speaking Franc-ly

The recent combination of a strong złoty and low interest rates has enabled banks in Poland to lower margins on their foreign-currency mortgages, making them much more attractive than those in the domestic currency - and much more popular.

Since 2002, when the value of mortgages granted in foreign currencies first overtook the value of those granted in złoty, foreign-currency loans have recorded consistent growth. Currently, about 70 percent of all mortgages in Poland are granted in other countries' currencies. However, experts say the Banking Supervision Commission's a test proposals for new regulations governing foreign-currency mortgages could eliminate the option for borrowers altogether.

Risk factor

The president of the National Bank of Poland (NBP), Leszek Balcerowicz, brushes aside these allegations. "Taking foreign-currency mortgages is connected with high risk for the borrowers. The Banking Supervision Commission [a regulatory body within the NBP] has to analyze how this risk could be limited. New regulations of the mortgage market are not to ban taking foreign-currency mortgages. They are only to introduce a dose of tools which would make a provision for the higher risk," Balcerowicz told Radio Zet.

According to NBP spokesperson Karol Smoląg, the priority of the Banking Supervision Commission is to transfer the currency risk from the borrower onto the bank. The commission wants to achieve this through imposing additional capital coverage, which will amount to eight percent of the foreign-currency mortgage amount. Smoląg highlights that banks will also have an obligation to pass on exhaustive and illustrative information to their customers, who very often are not fully aware of the currency risk. People are attracted by the low cost of current service and monthly payments, but are ignorant of the 30-year perspective, an average payback period for a mortgage. "For somebody who earns a net zł.2,500 monthly, a sudden jump of the monthly installment by zł.1,000, which can happen anytime, could be disastrous," says Smoląg.

However, Maciej Kossowski, an expert from Expander financial advisory firm, disagrees. "Customers cannot be deprived of the freedom to take this risk, which is not that big, by the way. It will even decrease with Poland's heading for the eurozone," he says, adding: "Moreover, the złoty is unlikely to weaken and the interst rates will not fall considerably. The Banking Supervision Commission assumed a black scenario."

Stress test

There is also a proposal to introduce obligatory 'stress tests', which would be the banks' investigation into the influence of atypical market conditions, such as interest rate changes, on the banks' and clients' situation. Other changes include decreasing the percentage of real-estate value that the mortgage would cover. Some banks granted mortgages for 100 percent of the property value. According to the proposed regulations, a foreign-currency mortgage would only cover 70 percent.

That worries Minister of Transport and Construction Jerzy Polaczek, who has decided to ask the Banking Supervision Commission for an analysis of the influence of its decisions on the housing market in Poland, fearing that the regulations would result in a decrease in the number of apartments built.

Kossowski worries about the effect on banks' clients: "The proposed regulations are not favorable for the customers. They will limit the access to the foreign currency mortgages. The competition among banks will be stronger, which will also be negative for the clients."

In customers' interest?

Still, Smoląg argues that the project aims neither at the collapse of housing, nor at harming customers. "This solution, which was consulted with the banks, is in the interest of banks' customers and mortgage takers," he says.

The proposals are now being examined by various banks. The Association of Polish Banks will present its final opinion on March 3.

The number and value of mortgages in Poland continue to experience significant growth. The Association of Polish Banks reports that in 2005 new home loans in Poland amounted to zł.22.4 billion, up 59 percent on 2004. "Demand in the real-estate market is likely to stay strong and we expect the pace of growth in 2006 to be similar to that in 2005," the Association's president, Krzysztof Pietraszkiewicz told Reuters. At the moment mortgages constitute about five percent of Polish GDP. Compared to the EU average of 43 percent, it's clear that the market still has huge growth potential.