Overseas home owner, Polish property buyer, got a Swiss Franc Mortgage?

February 3, 2015

Some homeowners might have become unnerved by the shock move of the Swiss Central Bank to abandon its policy of pegging the Swiss Franc to the euro with a 1.2 euro cap, which has been in force since 2011.

The original purpose of this policy was to create stability and fend off deflation. In fact the Swiss Franc has long been seen as a stable currency and been adopted as a low interest mortgage option in a number of countries, particularly in Central and Eastern Europe. But things changed in the new era of low interest rates, when the Swiss Franc strengthened.

Swiss Franc-Euro-mortgage-propertyBut if your mortgage is in Swiss Francs and you earn your money in Euros, or in another currency, as the Franc strengthens, the mortgage costs more. The debt remains the same in Swiss Francs, but costs are higher to repay that debt in Euros, or Polish Zloty, or whatever that currency might be. So those Swiss Franc mortgage-holders are left, not only with a larger mortgage when translated into their local currency denomination, but with higher monthly repayments to boot.

Why did the Swiss National Bank do it?

As the Euro weakened, the policy of buying more and more of an ever weaker currency became unsustainable. It was just damaging the domestic currency.

For the Swiss economy it is good news as the Swiss franc has strengthened, although exporters are suffering with the stronger cost of goods to foreign buyers.

Situation for homeowners in Europe?

The situation of exposure to Swiss Franc borrowing reared its head in 2009 in Hungary. It appears that Hungary suffered more than most countries given the volume of Swiss franc lending that took place, with 1.8 million mortgages out of 3.3 million being in foreign denominations, with the majority of secured debt being held in Swiss francs, at around 55%, so just under 1 million.

The Hungarian government obliged banks to convert forex mortgages to forints at favourable rates. For a typical Swiss Franc borrower their mortgage had risen by up to 50%, as did the monthly repayments.

Other countries like Cyprus and Croatia have also been affected

Polish property investors or homeowners

Historically interest rates have tended to be high for Polish Zloty mortgages, so alternative mortgage denominations were readily considered. The Swiss franc mortgage rate was usually significantly lower and so it was a serious alternative for many home buyers and investors. Is the situation as bad as in Hungary?

With a 39 million population and 13m households, around 55% of these own their home, around 7.2m. Of the owner occupiers, around 10% have a mortgage, so about 720,000. There are about 550,000 Polish Homeowners with $36bn worth of franc mortgages, 8% of Poland’s GDP.

Poor debtors only account for 3% of all Polish mortgages, 2% on foreign currency mortgages, as opposed to 4% delinquency on foreign currency mortgages in Hungary, where 30% of households have a mortgage.

FX mortgages comprise more than half of mortgages, so a similar proportion to the situation in Hungary. Although the proportion of impaired FX mortgages has been decreasing given the diminishing Swiss interest rates and the practice of converting impaired FX mortgages to PLN mortgages.

It is worth noting Polish banks have adopted a cautious approach to mortgage lending. By approving fewer and more sensible loans, Poland’s banks have limited their own risk and, at the same time, helped to create a stable and buoyant property market. It has tended to be foreign banks which have given the majority of Swiss franc mortgages

Poland property Scenarios

The mortgage holders could start class actions against the banks, claiming they weren’t given the best financial advice about the risks associated with such risky loans.

Or, as in Hungary, the State may intervene, and demand the CHF loans are converted to Polish Zloty. But this may well require an injection of taxpayers funds, which hard-pushed non-mortgaged, wage-earners, are not going to swallow easily.

Some homeowners may default or get into debt as a result, or indeed Switzerland may change its policy if exporters suffer unduly.

Property prices in Poland-forced downwards?

If mortgagees stop repaying loans to the extent that the properties are repossessed in significant enough numbers, and these are concentrated in one place, then it is possible. But let’s bear in mind that this will tend to affect the resale market only, not new build.

On an annual basis around 70,000 new residential dwellings are built. Total residential property transactions are around 158,000 per annum or PLN 44bn (or $11.9 bn). On this basis, resale accounts for just over half of the transactions, yet only about 10% of these will have a mortgage and only 3% may be vulnerable given the foreign currency exposure.

For new build, developers are starting to firm up their prices and not discount so heavily. The prices of the plots of residential land are starting to rise, in the major cities and supply is constrained. First-time buyers of new build are offered mortgage tax breaks on smaller properties (younger, permanent, residents), so giving extra stimulus to this sector.

So in conclusion, there may be a small proportion of distressed vendors in the resale sector, at some point if the situation is prolonged and severe. But given 82% of housing stock was built pre-2000, this might not be the type of property an overseas buyer will want to buy.

Beata Zalewska of Leach & Lang contributed to this post.

Sources: IMF, CSO, EMF, OECD, Eurostat, GPG, Economist

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