Recovery of costs related to bridge insurances of newly granted mortgage loans

Until the mortgage, which is the basic collateral of a mortgage loan, is effectively entered into the mortgage register of the property, bank is exposed to higher risk related to inadequate collateral for the credit facility. As a consequence, banks used to require a temporary collateral in form of so-called bridge insurance for the period from disbursement of the loan till the mortgage is established, i.e. until the date, when the registration of the mortgage in mortgage register is valid.

The insurance was executed in two ways: by additional insurance contribution paid by the borrower, amounting to approx. 0.07 – 0.1% of the value of the loan or, the most often, by temporary increase in margin.

TABLE 1. DATA ON MORTGAGE LOANS GRANTED IN Q3 2021

source: elaboration by Ministry of Justice based on: https://prnews.pl/raport-prnews-pl-rynek-kredytow-hipotecznych-iii-kw-2021-462315 (as for: 24.01.2022)

In recent years, the time needed for establishing the mortgage significantly increased in most of mortgage district courts. This resulted from both legal changes, in particular due to the act of July 20, 2018 on transformation of perpetual usufruct right to plots under residential buildings into the ownership right (Official Journal of 2018, item 1716), and reasons independent from State interference, i.e. COVID-19 pandemics. According to statistics published by the District Court for Warszawa-Mokotów in Warsaw, dealing with all applications related to mortgage registers of properties located in the city of Warsaw, in 2019 the number of mortgage applications accounted for 541 527, in 2020 it was 557 069, and in 2021 – 427 477, while in 2018 there were only 249 691 such applications. It is very difficult to estimate the time necessary for valid registration of the mortgage in mortgage register both for the borrower and for the bank. It depends not only from the city, where the property is located, but even from the particular court’s division, and differences happen to be huge. For example, in District Court in Opole, the mortgage entry took approx. 1 month, in Bialystok – 2 months, while in Warsaw or Gdansk it took even a year. In addition, one of decisive factors was whether the loan was taken for finance the purchase of property on secondary market (most of existing properties are already registered in mortgage register) or on primary market – in such case, the property must be registered in mortgage register first. In effect, the borrowers were uncertain about the final cost related to the effective mortgage entry, which increased the monthly loan instalment.

This problem was noticed by the government, which submitted to the parliament the draft act on changes in the Mortgage Loan Act of March 23, 2017 (Official Journal of 2020, item 1027 and 2320 and of 2022, item 872). As it was presented in the explanatory memorandum to the draft, in case of an average mortgage loan amounting to PLN 371 060 granted for 25 years, the average instalment was equal to PLN 2 839.36, while the average extra margin equivalent related to the waiting time for mortgage entry amounted to PLN 273.83 per month. Assuming the 8 months period, the total amount charged form the borrower was as high as PLN 2 190.65.

The Ministry stressed that in practice vast majority of mortgage applications are accepted by courts – rejected applications constituted only 1.6% of all considered applications in 2020-2021 (statistics include not only applications for mortgage entry, but also for change or removal). Therefore, the authors of draft proposed that all costs related with the mortgage entry paid by the borrower should be returned.

During the public consultations, it was pointed out that despite from justified and legitimate purpose of the new law, as there is no reason for consumers to pay for dilatory in justice administration, there is also no justification for transferring those costs to banks, which also have no influence on processing time of mortgage applications. In addition, it is irrelevant from the perspective of the bridge insurance whether the mortgage application will be accepted or rejected, as the insurance does not cover from risk of rejection, but provides guarantee against the non-repayment of loan before effective and strong collateral is established, i.e. against the situation when enforcement proceedings are impossible to conduct because of lack of effective mortgage entry in the mortgage register. What is more, in case when risk determined in insurance agreement does not materialise, the insurance company does not return the cost of insurance policy neither to bank, or to any other client. However, despite the questions and comments, the act was adopted in the Parliament, with no substantial changes.

On September 5, 2022, the Parliament adopted the aforementioned act and changes came into force on September 17, 2022. According to the act: „in case of granting a mortgage loan, loan agreement may provide for an additional cost related to processing time of mortgage application, which will be bore by the borrower until the effective mortgage entry into the mortgage register”, but this additional cost will be returned to the consumer or allocated to repayment of the outstanding loan amount, when the mortgage entry is valid. Finally, the borrower will not be charged for risk related to that collateral.

It should be pointed out that the new law is applicable only to new mortgage loan agreements concluded by consumers (i.e. to loans not related to business activity of the borrowers), and the obligatory recovery of costs related to bridge insurances is applicable in case of loan agreements concluded after the date of entry into force of the act, as well as in case of loan agreements concluded before that date, if on the date of new law’s entry into force the mortgage application has not yet been determined.

Irena Kruczek-Sidło
AMRON System Coordinator