Government guarantee instead of borrower’s down-payment – is this a solution for housing problems in Poland?

Polish Deal, a new social and economic programme announced on May 15, 2021 by the Prime Minister Mateusz Morawiecki, implies new regulations intended to be some kind of an energy boost for weakened, post-pandemic economy.

As the Programme does not relate much to the economy itself, two proposals draw particular attention of the public: subsidies for housing purchases called ‘housing voucher’ and the state guarantee for mortgage borrowers. Housing vouchers are described as specific form of state support for the families expressed in precise sums of money and therefore discussed the most by Polish political and economic commentators. However, it is the second proposal, providing for state guarantee for those Poles, who intend to take out a mortgage loan for purchase a housing, but do not have money for required down-payment, that seems to have the strongest possible impact on housing market and consumers behaviour.

Is it difficult to get a mortgage loan in Poland?

At present, taking out a mortgage loan by individual involves procedure of creditworthiness examination carried out by the bank, as well as the need to have a sum of money amounting at minimum from 10 to 20% of the value of purchased property, called down-payment. Assuming the average price of a studio located in a big city at the level of approx. PLN 200 – 250 thousand (excluding Warsaw, where the housing prices often exceed PLN 300 thousand), the minimal down-payment amounts to PLN 20 – 25 thousand. Additionally, transaction calculations must include the PCC-2 tax accounting to 2% of the transaction price in case of purchase at the secondary market, plus the notary fee at the level of approx. PLN 3 – 5 thousand. A person, who intend to take out such a loan, must consider a monthly instalment in the amount of approx. PLN 1 250. By saving such amount every month, it is possible to collect necessary amount within 2 years – that period of time may be considered as a simulation of everyday life with mortgage loan taken for the following decades. Such experience will bear fruits in the future by higher borrower’s awareness of his or her ability to repay a loan.

Government’s guarantee instead of own down-payment may result in lesser financial awareness of mortgage borrowers. When situation on labour market changes or when interest rates grow, many problems with regular repayments may occur and therefore the number of non-performing loans may raise, resulting in increased number of enforcement proceedings.

Will the lack of own contribution result in additional costs for the borrower?

Government guarantees will encourage banks to change the lending policies and to grant loans for 100% of the value of financed property. It is very possible that banks’ offers regarding such loans will be less favourable than those for customers with down-payment. Banks may treat lack of own contribution as a factor of increased credit risk, which will result in additional collaterals requirement. If the loan amount is equal to the value of purchased property, mortgage itself may turn out to be insufficient. It is the most likely that margins for loans with LtV ratio at the level of 100% will be the highest on the market and additionally, granting such loans will be dependent on some supplementary products that will have to be bought by a borrower together with a loan. Finally it may turn out that a borrower will have to pay more that he or she would pay in case of taking a loan with a down-payment.

If the group of beneficiaries will be numerous, this solution may actually influence the market. No need to save money for own contribution may support the excessive indebtedness and encourage the excessive risk-taking. Current levels of interest rates and good condition of residential real estate market allow to assess that risk as low, but when housing prices start to fall and interest rates start to increase, the loans may turn out to be too high to repay.

Primary or secondary market – which one will benefit the most?

The assumption that more transactions with the government guarantee will be concluded on the secondary market seems probable, as on the secondary market it is easier to negotiate the length of the period of time needed for the bank’s credit decision to the date of finalising the transaction. On primary market, one-month period from signing the promissory sale agreement to the date of the preliminary agreement in form of notarial deed is a standard. Moreover, in purpose to increase sales, developers probably will adjust the investments to formal frames set by the government’s programme. On the other hand, persons with no own resources for a deposit will have less chances for purchase of the property in good location and in good price – such purchases will always be more achievable for buyers with financial means allowing to reserve a property until the credit decision is taken.

Summary

From the economic perspective, availability of loans with no obligatory down-payment will provide the increased inflow of money on the housing market, which will result in rises of prices. Growth of demand will also translate into increases in prices of materials and construction services, building plots and other elements included in the construction process. Certainly, it is not yet known, what scale of the guarantee programme is planned, what will be the target group and what conditions will have to be fulfilled by potential beneficiaries. When the interest rates grows and the market starts to slow down, some part of beneficiaries will not be able to repay their loans granted with the state guarantee and selling the property may not be a solution in case that price of the property will not be sufficient for total repayment of the loan.

Hopefully the beneficiaries of the government programme will not become another “Swiss francs borrowers”, who did not realize what was the currency risk, the interest rate risk and the risk of decrease in value of real estate, nonetheless decided to sing a loan agreement for many years.

Jakub Kaczor
Platform of Mortgage Borrowers Support Coordinator