The mortgage market has clearly come to life. The growing number of development offers indicates that optimism has returned to the housing market. After a difficult year of 2009, when it was hampered by housing loans, today we can talk about a revival. In April, the number of construction starts increased by two-thirds compared to last year. Banks are again loosening their lending policies, and in particular they are returning to foreign currency loans. However, the potential borrower, who mimics the banks’ mistakes last year, is now approaching bank offers with reserve. If we have a move in the housing market, it is due to the clients’ own funds.
We’re moving for a loan
The new construction projects that are already in the pipeline may soon bring customer banks, because with the advancement of work and subsequent payments, there will be a demand for loans. Those who are looking for meaningful housing offers on the market are increasingly turning to new projects. In new investments, it is easier to choose an interesting and satisfying apartment or house, and buying at an early stage of construction usually has a measurable advantage in the form of a lower price. Not everyone, after the experience of people who built the economic system, has the courage to take on building itself.
Regardless of the choice of the property itself, a loan is almost always necessary for such an investment. The availability of the offer and fulfillment of creditworthiness conditions become the basic issues. The new banking regulations assume the necessity of having the repayment of a loan denominated loan higher by 30%. from the current one. This means that people with higher income will benefit primarily from denominated loans.
Few people have the entire amount needed to finance a housing investment, and even if they have such an amount, it is not entirely rational to get rid of savings. Leaving a financial cushion while investing in real estate is a necessity due to additional transaction costs and, above all, a long time horizon. The loan will be necessary. All that remains is the choice of credit and the age-old dilemma – a loan in zloty or a currency loan?
Loans in currency or gold?
The decision is not simple. For some, the matter will be obvious – tempting lower interest rates on denominated loans and a chance for a bonus along with the strengthening of the zloty. For others, the binding principle is that we incur liabilities in the currency in which we earn income. The problem is that these two forms of financing are not comparable. Inability to compare loan offers in PLN and EUR is caused by additional currency risk.
The problem would not be if the course in the loan period was stable. Unfortunately, banks do not want to take full costs of exchange rate risk on themselves. Borrowers, therefore, willy-nilly, become speculators on the foreign exchange market. When choosing a loan denominated, you have to take into account the costs of currency risk, and therefore skillfully manage it, even by creating appropriate reserves for worse times.
The tempting prospect of lower installments
The lower installment due to the lower interest rate is always the most appealing argument for loans denominated in the imagination. When comparing interest rates on loans in PLN with loans in euros, we note that the gap between 2009 and 2010 has increased again (see chart below). Banks operating in Poland have more and more funding opportunities on the euronet. The financial crisis, which blocked the availability of new loans at the end of 2008, has ended. Banks are happy to provide denominated loans again, because they simply pay off. They earn mainly on a higher margin, as the LIBOR base rate for the euro is many times lower than the WIBOR base rate. What’s more, they earn on additional commissions and, above all, on a currency spread.
Attention to additional costs
Currency spreads, i.e. the difference between the sale rate and the buying rate, reach in a few or a dozen cents. Last year, record-breakers earned 40 cents on one Swiss franc. Banks earn on exchange differences not only when paying installments, but already when paying out a loan. Exchange rates must pay special attention when the loan is disbursed in tranches. After a few months, the exchange rate may change drastically, which in the case of strengthening the zloty will mean a smaller amount to be paid out. In contrast, a stronger zloty will be most desirable when repaying.
Spreads are not the only costs. Banks introduce additional obligations related to, for example, the possibility of repayment of a loan in foreign currency. Since last year, banks have formally had to introduce such a possibility. Borrowers, however, have been severely disappointed, because banks even require an account whose running costs are usually many times higher than regular bills. You can not be fooled by free conversion, because it is generally one-off, and besides, the rate at which it occurs is usually the least favorable for the borrower.
Safe currency strategy
6750 The loans are denominated by an attractive variety of the mortgage loan offer, but their rating is not as obvious as the advertisements present. We have recently observed a renaissance of denominated loans, this time in euro. In the past Swiss francs, dollars and even yen reigned. Borrowers, who then earned on exchange rate differences, will always say that the denominated loan is the best. Those who used loans denominated in the end of 2008 will not be so clear in the assessments. They can of course say that in the spring of 2009 the zloty temporarily weakened, but it is not the borrower’s dream of loan and installment, which are almost twice as high overnight. And in addition, the bank demands additional security! In such a situation, arguments about a temporary weakening of the zloty and other logical arguments are not related to the stress related to growing debt.
Every stress can and must be fought. The denominated loan should primarily be an additional source of savings. The difference between the installment in zlotys and the corresponding repayment of denominated loans should be postponed. The reserve fund established in this way will allow for higher installments when the situation on the currency market turns to the detriment of the borrower. The surplus invested may also be designed to overpay the loan, which in turn will reduce the value exposed to currency risk. Such an active approach will allow even better use of the benefits of denominated loans.
Otherwise, let’s choose the zloty, which also seems to be a reasonable solution in connection with the plans to introduce the euro. Entering the Eurozone does not mean that today the loans denominated in this currency are safer than if there were no such prospects. In practice, it can be quite the opposite due to differences in exchange rates at banks (spread) and the official exchange rate. In the context of the rapid entry into the euro zone, loans in zlotys may, contrary to appearances, prove to be more profitable as their margins are significantly lower.