Swiss Franc Mortgages in Poland

Definition of a Swiss Franc Mortgage

A mortgage loan in Swiss currency – CHF (so-called “Swiss Franc Loan”) means an obligation on the credit undertaken in particular by individuals (so-called “Franc -Borrower” in Polish) in the  long term and furnished with a currency risk because of its index to or denomination in  a foreign currency (here with regard to CHF currency). Funds received through this type of loan were usually used for the purchase of residential property or real estate within the conducting of business activities. The repayment of the loan was secured by a mortgage created for instance on a house, apartment or development land. The Swiss Franc mortgage had to be paid and repaid  in  Polish currency. A bank granting the loan calculated the amount of each  instalment using its own determined rate of exchange, which could vary from the rate of exchange of the Polish National Bank. In many mortgage agreements the manner was not provided  in which the rate of exchange should be calculated and this has led in recent years to a situation in which “Franc – Borrowers” took banks to court to declare the “exchange clause” to be abusive and invalid.[1] We differentiate between two kinds of swiss franc mortgages:

• mortgages denominated in CHF currency, to be repaid in Polish currency (PLN) and on the day the mortgage is issued it will be converted on the basis of the currency purchase rate”[2] The repayment timetable shall be given in CHF and the borrower repays the mortgage in CHF or PLN currency in accordance with the purchase rate  fixed by the bank. The paid amount in PLN will be lower if,  from the date of application for the mortgage is granted until the day of the mortgage is disbursed the CHF will raise in value. The opposite situation is also possible which favors the borrower[3]
• mortgages indexed to CHF currency – the amount of the mortgage is given in PLN. The mortgage will be paid in PLN and the repayment timetable is provided in CHF. However, the mortgage will be repaid in PLN on the basis of the current rate of exchange or in CHF. Both within the denominated mortgage  and the mortgage index, the outstanding balance is expressed in CHF and it is a basis for the calculation of the amount of repayment instalments. Furthermore, the currency flow occurs only in cases in which the borrower decides to pay back the loan in CHF.

Another credit instrument is the so-called foreign currency loan which is defined within the loan agreement and in the repayment scheme, disbursed and paid back in the same currency.[4] The differences between these loans are outlined in the following table: [5]

Table 1: Types of swiss franc mortgages, others and the loan service

 Source : NIK /red arrow shows that the conversion shall be on the basis of the purchase rate by the bank and the blue arrows indicate  that conversation is based on the sale rate of the bank

Definitions:
“indeksowany” means „indexed”
“denominowany” means denominated
“walutowy” means in foreign currency
“złotówkow” means in Polish currency

“zobowiąznie wyrażone w umowie w” means obligation expressed in the agreement in:
“Wypłata w:” means payment in:
“Harmonogram spłat kredyutu wyrażony w:” means scheme of repayment the loan in:”
“Spłata w:” means “repayment in”

 Overview of swiss franc mortgages in Poland

Many individuals took out  mortgages in Swiss francs, particularly  in the years 2006 – 2008. The first mortgages of this kind became available in 1996, however, the history of Swiss Franc Mortgages began in  2004 and this was the result of the low rate of exchange of PLN/CHF,  in the region of 3 PLN at that time and consequently these loans were cheaper than mortgages in Polish currency. For banks, this turned out to be a chance  to gain significant profit. The Polish Financial Supervision Authority published data showing that the amount of mortgages granted in  foreign currency in Poland totaled 6.1 billion PLN  in 2004. It is also worth pointing out that Poland joined the European Union in 2004 and foreign investors became more eager to invest in our country.

Swiss Franc Mortgage and the first S–Recommendation from the Financial Supervision Authority

S-Recommendation became effective in 2006. In these times the value of Swiss franc mortgages were consistently growing and  reached the amount of 56 billion PLN (10 times more than in 2004) when the rate of exchange amounted to 2 PLN. According to S-Recommendation banks were required to present to borrowers a simulation of the loan instalments provided that the rate of exchange of PLN to foreign currency would be weaker by 20% and by increasing  the interest rate by 4pp (percentage points).[6] In addition  banks were also requested to present the first version of the mortgage offer in PLN to borrowers. In the event of the client choosing another loan, he/she had to state in writing their decision to choose a loan in foreign currency or in the currency indexed to the foreign currency and that they were aware of any risks resulting from this. Moreover, he/she also had to confirm in writing that they had been informed by the bank about the interest rate risk. At the core of S-Recommendation was the intention to set a maximum indicator LTV[7] taking into consideration fluctuation of certain currencies.[8]

Despite the introduction of the first S–Recommendation (after which the pace of lending in Swiss francs was slowing down) the year 2008 was the peak of the popularity of Swiss Franc mortgages.  The main factors were as follows:

• low CHF rate
• lower interest rate of loans in CHF than in PLN
• ready availability of loans
• increased demand for apartments
• increase of competition of banks
• good market situation
• lower level of economic knowledge
• insufficiency or lack of appropriate legal regulations.[9]

Swiss Franc Mortgages and the second  S–Recommendation from the Financial Supervision Authority (2008 -2009)

By the end of 2008 a second S-Recommendation of the Polish Financial Supervision Authority was introduced, subject to good practices, while offering mortgage secured loans. It became effective in April 2009. There was an obligation imposed on the banks to inform borrowers about the risks related to currency spreads. In addition, a possibility of repayment of the loan in the indexed currency meaning in CHF) was also recommended. In the latter case, the borrower had to bear the additional costs (including annex to the loan agreement amending its currency) and he/she had the right to buy the currency elsewhere.

Swiss Franc Mortgages and the third  S–Recommendation from the Financial Supervision Authority (2011)

The second S-Recommendation (2008) was replaced by the third S-Recommendation in 2011. It contained a new requirement according to which the maximum level of expenditure for mortgage services in relation to the average net income of the borrower couldn’t  exceed 42%. Since then  creditworthiness has been calculated for a maximum period of 25 years. In the situation in which the obligation was undertaken for over 25 years and the maximum level recommended was taken, the lender also had to take into account  the reaching of retirement age by borrower and to consider the reduction of the income proportionally.

Swiss Franc Mortgages and the fourth   S–Recommendation from the Financial Supervision Authority (2013)

The fourth S–Recommendation in 2013 stipulated a maximum repayment term of 25 years. In accordance with the regulations  creditworthiness was anticipated for 30 years. This meant fewer persons having the chance to take out such a loan. Also a minimum deposit was fixed at the level of 20% in the period between 2014 and 2017. Banks were also requested to consider the exchange rate of the  Swiss Franc in  adequate relation to expenditure to income as well as to LTV indicators. In addition, banks were forced to agree to a financial commitment in the currency in which the borrower earns their living.

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[1] The abusive clauses are also called clauses prohibited by law in the meaning of Article 385 ¹ of the Polish Civil Code which are inserted into agreements between consumers and entrepreneurs not negotiated individually and framing rights and obligations contrary to common decency and violating grossly consumer’s interests. Source: https://lexplay.pl/artykul/Prawo-Umow/Klauzule-abuzywne-pojecie-tresc-i-skutki-prawne

[2] The purchase exchange rate of a currency means a rate at which a bank (or a currency exchange bureau) exchanges this currency into PLN for their clients. The purchase exchange rate of a foreign currency is always lower than the rate at which this currency will be offered for sale. Otherwise the bank or currency exchange bureau would suffer loss if they had purchased the currency at a higher rate than the rate of its sale. The difference between these two rates constitutes a “currency spread”

[3] In the case of foreign mortgages, banks grant the loan calculated in accordance with the purchase rate and the actual debt of the borrower is assessed on the basis of the sale rate. For instance, a borrower takes a loan denominated in CHF amounting to 100 000 PLN and this amount is converted into CHF pursuant to the sale rate. In the event of the purchase rate amounting to 2.5 PLN to 1 CHF, the indebtedness amounts to 40 000 CHF. If the debt and instalments are calculated in PLN in accordance with the sale exchange, then the borrower would have  to pay back the loan at a level of 3 PLN to 1 CHF which means 120 000 PLN. In this situation the bank earns only 20 000 PLN thanks to the currency spread. Thus any borrowers having foreign mortgages are interested in the strengthening of PLN.

[4] This article  deals with loans denominated in or indexed to CHF currency although there were mortgages denominated in or indexed to USD or to EUR – currency but due to their marginal character they were treated in the same way  as Swiss franc mortgages.

[5] https://enerad.pl/finanse/kredyt-hipoteczny/kredyt-we-frankach-szwajcarskich/

[6] S-recommendation had a direct impact on the calculation of creditworthiness in the case of foreign currency lending. A borrower intending to take a mortgage had to show that his /her creditworthiness was 20% higher than before 2006 and this led to the situation in which persons having lower income were deemed not eligible for these loans.

[7] Indicator:  Loan to Value (LTV) –  it refers to the relation of the fixed property on which a mortgage has been established to secure the repayment of a loan. The indicator LTV varies during the time of the loan service. If interest and loan instalments are repaid, the value of the loan decreases. The value of security can also rise and fall. In the event of loans granted in a foreign currency there is also a foreign exchange risk associated with this. If the value of security (e.g. the real estate market collapse) and/or the value of national currency in relation to the value of the currency in which the lending was provided falls, a situation can occur in which the value of security will be lower than the value of the loan – the indicator exceeding 100% (many franc – borrowers were affected by this situation)

[8] In  2007 the value  of loans granted in Swiss Francs dropped by 38 760 PLN  to 122 589 PLN.  Apart from S – recommendations the reduction of Swiss franc  mortgages was also caused by an increase of interests rates in Poland and Switzerland   https://enerad.pl/finanse/kredyt-hipoteczny/kredyt-we-frankach-szwajcarskich/

[9] https://enerad.pl/finanse/kredyt-hipoteczny/kredyt-we-frankach-szwajcarskich/