Mortgage conversion is a way to more favorable loan repayment terms. However, it is not always profitable. Procedures may be subject to high commissions and additional fees. Is it worth making a conversion then? How and when is the best time to decide on it? We answer!
Foreign currency loans
Foreign currency loan is a loan that is granted in a currency other than the currency in force in a given country. It is also called a foreign currency loan. In Poland, this loan is most often offered in euros or in Swiss francs.
Until recently, a loan in a foreign currency could have been taken out by anyone who showed adequate creditworthiness. Today, however, it can be used by people who earn income in the currency in which they want to make a commitment.
What is currency risk?
Currency risk is the possibility of incurring losses as a result of changes in exchange rates. Fluctuations in these rates can lead to better but also worsening of your financial situation.
However, you can never accurately predict the direction and scale of changes in exchange rates. Therefore, when investing or incurring liabilities in a currency other than the one in which you earn, you are always burdened with such a risk.
Mortgage conversion in 2020 – what is it about?
Currency conversion of a loan is one of the ways to restructure, i.e. to change the method of settling the financial liability. With it, you can set new, more favorable loan repayment terms.
It involves changing the currency in which the loan is repaid. This solution is dedicated mainly to people who made a commitment to the strengthening currency. Along with the strengthening of the currency, interest rates increase, and hence the interest rate on the loan.
The more the currency is strengthened, the higher the loan costs are. So if you have a foreign currency mortgage, you will have to bear the costs associated with global economic changes that are complete without your influence.
What regulations govern the procedure for converting a loan?
There are currently no separate provisions regarding the conversion of the loan. The provisions of the Banking Act and general legal provisions apply. Due to the problem of people who took out loans in francs, work is still underway on changes in the currency conversion law.
When is it worth converting the mortgage?
Currency conversion results in the fact that after its introduction, further installment repayments will take place in dollars. This means that the installment amount is certain and the currency risk is leveled out. However, this solution does not always pay off. It is favorable when the loan currency rate stays low and the dollar is strong.
In addition, analysts predict that the currency in which you took out the loan will strengthen. Currency conversion can also be beneficial if the currency in which you earn has changed.
What are the benefits of loan conversion?
The greatest benefit of currency conversion is the certainty about the amount of loan installments. However, this solution also has many disadvantages that you should keep in mind before making hasty decisions.
What are the pros and cons of converting your mortgage?
Before you start thinking about changing the currency in which you repay the loan, check what currency conversion involves. The pros and cons of such a decision are not always balanced.
- the need to pay a commission for currency conversion
- the threat of higher loan margin
- risk of less favorable interest rate
- the need to pay additional currency exchange costs
- paying off the rest of the loan in USD
- a chance to lower the loan margin
- a chance to take advantage of more favorable interest rates
- the certainty of a fixed installment payment
Rules for converting the mortgage
The procedure for converting your mortgage is subject to certain rules. The legal regulations that banks are subject to impose restrictions on those who want to convert a loan. What rules apply in this regard?
Who can convert the loan?
According to the “S” recommendation issued by the Polish Financial Supervision Authority, loans in foreign currency may be granted only to persons who document that they collect income in it.
This means that people who earn only in USD cannot apply for a foreign currency loan. They also cannot apply for the conversion of a loan already granted in USD.
To apply for a loan conversion, you must prove that you earn in a particular currency. The bank usually requires appropriate certificates translated into Polish.
How long does it take to convert the loan?
It is difficult to say unequivocally how long it will take to convert the loan. The application is not complicated, but in many cases, the bank is testing the applicant’s creditworthiness again.
The waiting time for a decision may, therefore, resemble applying for a grant.
How much does it cost to convert a mortgage?
Banks charge considerable fees for the currency conversion of a loan. They usually add a commission for currency conversion in the amount of 0.5 to 1.5 percent of the debt balance. It is added monthly to the loan repayment installment.
In addition, they also charge a fee for drawing up an annex to the contract, specifying the terms of currency conversion. Normally it is from 100 to 350 USD. An additional cost is also the so-called currency spread, which is the difference between the rate of payment and repayment of the loan. How much the currency conversion of the loan costs depends ultimately on the individual offer of the bank.