Fund for Mortgage Borrowers Support

On 8 March, 2022 the Monetary Policy Council raised the reference interest rate once again. This time the rate was increased by 0.75 basis points and reached the level of 3.5%, which is the highest value since February 2013. The Monetary Policy Council has been systematically raising the main interest rate every month since October 2021, which results in another increase in instalments of variable interest rate loans. These types of loans dominate in Poland. According to the data of the European Mortgage Federation, in December 2020 variable interest rate mortgage loans in Poland constituted 100% of all granted mortgage loans, which distinguished Poland from other countries in the region. Currently, this trend has changed. According to the recommendation of the Polish Financial Supervision Authority (PFSA), from July 2021, loans with a fixed interest rate should be offered by all commercial bank. Despite this recommendation, credits with fixed interest rate have not revolutionised the Polish mortgage market yet.

CHART 1. THE NBP REFERENCE RATE LEVEL

source: self-study based on the data of the National Bank of Poland

While previous interest rates rises were aimed at stopping inflation, the latest increase is additionally related to the necessity to protect Polish currency in connection with the Russian invasion of Ukraine and its economic consequences. The Monetary Policy Council has announced that this growth was not the last reference rates rise, what could become a problem for households that contracted a loan at historically low interest rates and misjudged the risk of significant increase in instalments, or for households that took out loans despite high level of a debt service to income (DStI) ratio. DStI is the ratio of the customer’s total annual commitments (credit and non-credit financial obligations) to the total annual income of the customer. In accordance with the Recommendation S of the PFSA: In the process of assessing the creditworthiness of retail clients, the bank should draw special attention to situations when the DStI ratio is higher than 40% for clients with income not exceeding the average level of remuneration in their place of residence, and 50% for other clients. Moreover, Recommendation S indicates: The bank should identify customers, whose loans are characterized by a high DStI ratio (exceeding 30% for customers with income not exceeding the average level of remuneration in the economy or place of residence or 40% for other customers) and low income buffer and analyse their situation and resilience to increase in interest rates at least once a year, especially in the environment of low interest rates. According to the data published by the PFSA, at the end of 2020, the median of the DStI distribution was within the range from 20% to 30%.

CHART 2. DISTRIBUTION OF PLN AND FOREIGN CURRENCY HOUSING LOANS IN TERMS OF DSTI LEVEL BY GROSS CARRYING AMOUNT AT THE END OF 2020 (PLN BILLION)

source: Information on the situation of the banking sector in 2020, the Polish Financial Supervision Authority, Department of Commercial and Specialist Banking, Banking Sector Analysis Team, Warsaw, July 2021.

The above-mentioned increases in interest rates, as well as rising inflation, contribute to the deterioration of the financial situation of Poles. The consumer inflation forecast by the National Bank of Poland in 2022 will amount to 10.8% and its peak at the level of 12.1% is foreseen to occur in the third quarter of this year, while according to the projection from November 2021, the consumer inflation forecast for 2022 was expected to be equal to 5.8%. As a result of all factors described above plus lower remunerations resulting from taxation changes related to the Polish Deal and the constant increases in gas and fossil fuel prices, some households’ budgets will run out.

In these circumstances, the Fund for Mortgage Borrowers Support established by the Act of October 9, 2015 on supporting mortgage borrowers who took out a housing loan and are in a difficult financial situation (Journal of Laws of 2021, item 1516, 1535), may turn out to be helpful for some borrowers.

The purpose of the Fund is: (…) to provide repayable support for credit recipients who found themselves in difficult financial situation and who are obliged to repay mortgage instalments that are significantly burdening the household budget . In addition the Fund’s goal is: to ensure a repayable loan to cover the remaining part of the debt after the sale of the real estate3. As part of the offered support, natural persons can obtain a maximum of PLN 72 000 in the form of an interest-free loan, which is a very advantageous option due to the current inflation. Beneficiaries will be eligible for assistance for a period of maximum 36 months. The amount of the monthly support is determined individually depending on the principal and interest instalment, however, the monthly support cannot exceed PLN 2 000. If the beneficiary decides to sell the credited real estate and the funds obtained from the transaction do not cover the remaining loan amount, the borrower may apply for a loan in the amount not exceeding PLN 72 000 to repay the debt. Monthly instalment support and the loan is provided through Bank Gospodarstwa Krajowego (BGK). The Fund’s resources are endowed from lenders’ contributions, in proportion to the size of portfolio of mortgage loans with delay in repayments of principal or interest exceeding 90 days, as well as from support returns and incomes from investing the Fund’s free resources. To obtain support, an appropriate application must be submitted to the bank where the loan is repaid. Importantly, borrowers with loans in both Polish and foreign currencies can count on support.

Pursuant to the Act, support is granted if at least one of the conditions is fulfilled:

• at least one of the borrowers will lose the job and has a status of an unemployed person,
• monthly loan servicing costs exceed 50% of the household’s income,
• the income after deducting the instalment does not exceed:
• o in case of single person households – double of the adjusted amount referred to in Art. 8 sec. 1 point 1 of the Act of March 12, 2004 on Social Assistance (i.e. Journal of Laws of 2021, items 2268, 2270, of 2022, items 1, 66), currently PLN 1 552,
• o in case of multi-person households – double of the adjusted amount referred to in Art. 8 sec. 1 point 2 of the Act of March 12, 2004 on Social Assistance (i.e. Journal of Laws of 2021, items 2268, 2270, of 2022, items 1, 66), currently PLN 1 200 per person.

The criteria are strict, even after taking account of significant growth of interest rates. In case the premise, under which the borrower obtained the support, ceases to exist before the 36th month, the borrower is obliged to promptly inform the bank about it. On this basis, the bank suspends the payment of support. In addition, the period of transfer of funds will be shortened, if the object of credit is sold, the housing loan agreement is terminated, against the financed property acts of execution are taken or the loan is repaid.

The legislature has provided exclusion criteria for obtaining assistance:

• the borrower lost his employment on the initiative or through the action of the borrower himself,
• one of the borrowers has already received this type of support (exception: if support is no longer being disbursed and support has been disbursed for no longer than 35 months, the total support may be disbursed for up to 36 months),
• the mortgage loan agreement has been terminated prior to the application for such assistance was submitted,
• support is not allowable for the period when at least one borrower is entitled to an unemployment benefit under a contract of credit repayment insurance,
• during 6 months preceding the application for support, the borrower owned another dwelling: the borrower was an owner or had a cooperative right to a dwelling in a housing cooperative or had a claim for transfer of ownership or cooperative right to a dwelling in a housing cooperative.

The obtained support or loan to pay back the debt are repayable in 144 interest-free, equal monthly instalments. The repayment begins two years after the pay-out of the last instalment of the support or loan. Pursuant to the Article 19 sec. 3 of the Act: if a borrower repays 100 instalments without delay, the remaining part of the support instalments or loan for debt repayment is remitted. Due to this provision, the borrower may save PLN 22 000 having regard to the maximum allowable amount of support or loan.

According to the data provided by BGK: 1 161 support contracts for the total amount of PLN 31.5 million were registered until December 31, 2020. The Fund’s expenses include payments, remissions and commission remunerations. As for December 31, 2020, there were 14 728 support instalments paid out for the amount of PLN 18.9 million and the disbursed support in the amount of PLN 0.3 million was waived. The Fund received repayments of the disbursed support in the amount of PLN 1.4 million.

Considering the current economic conditions in Poland, increasing interest in the offered support in mortgage loan repayments is expected. It is worth mentioning that in case of problems with loan repayments, other options are also available, such as the so-called “repayment-free periods” when credit repayments are suspended, extension of the loan period aimed at reducing instalments, loans consolidation, and even declaration of a consumer bankruptcy. However, in the event of liquidity problems it is a good idea to start with talking with the bank.

Judyta Konopka
Project management specialist