Most banks still offer only variable interest rates in their mortgage-secured products, but the new S recommendation, which is the guidelines of the Polish Financial Supervision Authority, indicates the need to develop a fixed interest rate loan offer.
The mortgage interest rate consists of two elements. In the case of loans in Polish zlotys, we are talking about the reference interest rate on loans on the Polish interbank market (the so-called WIBOR) and the bank’s margin.
In the case of loans granted in foreign currencies, it is usually LIBOR, i.e. the interest rate on interbank loans in London plus the bank’s margin. While the bank’s margin is constant throughout the entire term of the contract, WIBOR and LIBOR change adequately to the market situation and are set at 3 or 6 months.
Variable interest rate
Floating mortgages are by far the most popular variant. The variable part of interest rate is WIBOR 3M or WIBOR 6M. Due to the borrower’s risk of changes in interest rates, loans with a variable interest rate are much cheaper at the contracting stage.
Due to the risk of interest rate increases, the PFSA recommends that banks introduce mortgage products with periodically constant interest rates into their offer. This treatment is intended to protect customers against the drastic increase in monthly installments.
Fixed interest rate
In Polish reality, mainly so-called periodically a fixed interest rate. A fixed rate mortgage means that the customer pays the same installment over the period agreed in the contract. The most frequently offered loans are fixed rate loans for 5 years. After this period, most contracts provide for the use of a variable interest rate or re-establishment of fixed interest conditions for the next 5 years.
Due to the fact that when entering into a mortgage contract with a fixed interest rate, the bank accepts the risk of raising interest rates, this is associated with higher costs. In the case of fixed interest rates, the loan margin is higher, and the bank may expect additional collateral. The borrower, paying a higher installment, hedges against the risk of its increase during the period provided for in the contract. In the event of a reduction in interest rates, however, he will not be the beneficiary of any reduction in installments, and in addition, if he wants to make an earlier repayment, he may be charged additional costs.
When deciding on a mortgage, it is worth consulting with a financial advisor especially regarding the choice between periodically fixed and variable interest rates. While the idea of the new recommendation is focused on securing against unexpected increase in installments, it only allows for a limited period of time and brings significant costs and restrictions.