A few days ago, we described the long-standing problem with fixed-rate home loans. It relates to a situation where the customer pays off these mortgages early. Banks have a problem because they are not sure how to calculate commissions (compensation) in such a situation. According to Polish and EU law, they can do so, but regulations, imprecise in their opinion, prevent them from charging such a fee. The details of this dilemma and the position of the Polish FSA are described in this text.
And although the portfolio of fixed-rate mortgages in Poland is still not very large, and customers do not yet pay this type of loan in advance (because interest rates do not fall), the supervision is aware of the challenge, paying attention to interest rate risks. what’s the problem?
The cost of the guarantee becomes weighty after early repayment
– Banks hedge interest rate risk on a portfolio basis, and these hedges cover many contracts. If prepayment of a fixed-rate loan results in the need to release the collateral, this affects the bank’s income or equity statement. In other words: the asset and the income expected from it disappear because the loan has been repaid ahead of schedule, and the collateral and associated cost remain. This is why the mortgage law provides for the possibility of collecting compensation for early repayment, says a banker close to the matter who wants to remain anonymous.
Our interlocutor means the Mortgage Act of 2017, which, however, vaguely specifies how banks should calculate such commissions. He stresses that this is not a source of additional “profits” for banks, however A fee that covers the cost of the collateral, which becomes redundant after an early payment on a fixed-rate mortgage. It’s not a big deal right now, he adds, because there are relatively few prepayments for fixed-rate mortgages. It will be revealed when the volumes of these loans increase (although it is not an insignificant value already: 212,000 contracts worth PLN 54 billion) and interest rates begin to fall (customers will start looking for interest rates lower than the current fixed ones).
According to our unofficial information, discussions on this topic are ongoing Between banks and the Office of Competition and Consumer Protection. The financial sector wants to break the deadlock and clarify regulations. The role of the Office of Competition and Consumer Protection (UOKiK) has been very important in recent years in the field of retail banking contracts, and it was this institution that provided the arguments for the concessionaires in the court battle with the banks. The financial sector wants to agree with UOKiK to interpret the provisions on commissions for early repayment of fixed-rate mortgages in order to avoid legal risks in this regard in the future.
According to our information, banks have suggested that early settlement commissions for fixed rate mortgages are regulated similarly to the UK. There, it is often calculated as a percentage of the principal remaining to be paid back. It is usually in the range of 1-5%. This rate may depend on the number of remaining years to be paid during the fixed rate period. For example, if a customer has a fixed interest rate for five years, and if the contract is closed in the first year, the commission will be 5%. Prepayment in the second year of the fixed rate is 4 percent commission, and in the third year it will be 3 percent. etc.
What are the costs to borrowers in Poland if a similar solution is adopted as in Great Britain? The average value of new housing loans in our country, granted in 2022, is about PLN 340,000. zlotys. Therefore, a person who wants to pay back the principal in full at the end of the first year after obtaining the loan must spend approximately PLN 17,000. PLN for commission. at a rate of 2 percent. And assuming that after three years the capital decreases to PLN 320,000. PLN, the commission for early repayment is about PLN 9.5 thousand. zlotys. In the fifth year, 1 percent. Commission means cost 3000. zlotys. Such fees can be imposed regardless of whether interest rates have changed (in some countries they are only allowed when interest rates have fallen).
Does UOKiK accept such a model in Poland? The office did not respond directly to this proposal. Polish law and EU law do not exclude the possibility of charging such fees, but it must be remembered that they are accompanied by certain conditions. If the banks think that the act is defective, they should turn to the authorities with legislative initiative, and if they think that the provisions require interpretation, they should turn to the drafters of these regulations. Early repayment regulations are one element of a larger process of making fixed rate loans for a longer term (eventually until the end of the contract) an attractive and popular financial product.
See also: Fixed rate loans: everything you need to know about them. What about the installments at the end of the contract?
In some cases in the UK, an early payment fee for an Equal Mortgage is also levied when the customer has paid back a significant part of the principal (but not all and the contract is still ongoing). Local banks have different approaches in this regard. A large part of them ask for a commission if the customer pays more than 10 percent. capital in a year.
Not only legal risks, but also interest rate risks
Charging a commission on early repayment of a fixed-rate mortgage would prevent banks from exposing themselves to the interest rate risk of early prepayments. The KNF office recently indicated in its position that it requires clarification: if the regulations that allow banks to charge such commissions are clarified, they must do so in accordance with the law (and specify their amount in a way that is clear to the customer), and if they cannot, they must recognize the risks of early payment, For example, with a higher margin on these loans or by using appropriate hedging tools (which would not help the attractiveness of fixed-rate mortgages, because their rates would have to be correspondingly higher).
It matters because both the recommendations of the Polish Financial Supervisory Authority and the EBA guidelines require banks to match the revaluation dates of assets and liabilities and to stabilize interest income. The mismatch problem is illustrated by the SVB breakdown. The new EBA guidelines require interest income to stabilize to a greater extent than before, but the problem remains the cost of collateral after the prepaid principal disappears from the balance sheet, one banker asserts.
– if nothing changes and the issue of early repayment compensation is not resolved, and at the same time the portfolio of fixed-rate mortgages grows, This will generate new systemic risks in Poland. Which bank will be exposed to them. This risk may materialize when interest rates fall and clients start repaying fixed rate loans ahead of schedule, as estimated by our interlocutors.
The risks highlighted by the SVB in the US were recently discussed by Marcin Mikołajczyk, Vice President of the KNF. – Looking from the perspective of our market and our fixed-interest loans, there is the issue of compensation for early repayment and the fact that the banking sector indicates the need to regulate this issue unequivocally. We see this problem, we noticed it, so we turned to the regulator, that is, the Minister of Finance, indicating that this element can help shape this market. In a civilized and understandable manner for all stakeholders, including for the benefit of customers and the financial sector itself – he said during the banking forum.
He noted that the recent events in the United States indicate the special importance of the issue of interest rate management. – It is unacceptable to ignore the issue of guarantees that are supposed to stabilize interest rate risks while increasing the share of the fixed-rate portfolio. The tools for this are partly available, and partly the market needs to be developed – added Mikołajzyk, who is responsible for supervising the banking sector in the KNF office.
This type of compensation is collected in most countries where the percentage of fixed rate loans is high. According to the experts we spoke to, this factor, even before the development of the mortgage bond market, was critical to the development of fixed-rate mortgages.
Ending the uncertainty would help all parties
Supervisors and bankers point out that regulating the issuance of commissions for early settlement of mortgages may bring benefits to the customers themselves. Now, banks don’t charge this fee and take into account the risk of early settlement of margin or interest rate instruments (although probably not in full). Thus, this negatively affects all customers. Even those who do not plan to repay early.
– Since the product generates risks for the bank, it is natural that it is included in the price, that is, in the higher margin. So If the prepayment and offset risks in the case of fixed-rate mortgages are resolved, these loans could be a little cheaper than in a scenario where banks take these risks into account when pricing the product.. Moreover, in the absence of compensation for the actual prepayment, everyone pays a higher price, including those who do not use the possibility of prepayment – says one banker. If commissions can be charged, only those who have used early repayment will pay them, and it will not apply to clients who go according to schedule.
See also: The Polish Financial Supervisory Authority is tightening requirements for banks. This can make it easier to get a fixed rate mortgage
It highlights another factor. Our standard is a five-year fixed-rate period (although some banks offer seven years, and some even ten). In his opinion, the risk of prepayments prevents the market from extending the period of hedging, and thus also from extending the fixed interest rate. Therefore, it is also in the interest of customers to settle the matter finally. He adds that fixed-rate mortgages must be legally safe, not only for consumers, but also for banks, so as not to generate sectoral risk.
The possibility of prepaying a fixed-rate mortgage would have another effect: it would make it unprofitable for all customers. Such a move would be determined by those who would be able to find the interest rate on the new mortgage so clearly lower than the current one, that the benefits from it would cover the cost of the commission paid to the bank.
Author: Maciej Rudke, journalist for Business Insider Polska
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