A question re Swiss Francs and Polish mortgages

Can anyone clarify this phenomenon for me ? Having a conversation and it’s been explained to me that a lot of Polish mortgage business is being denominated in Swiss Francs.

Is this right or wrong ? A layman’s explanation as to how/why etc would be great.

Thanks in advance.

Interest rates on zloty are more than on francs.

It leaves a nasty exposure to exchange rate movements though.

It has also been popular in Bulgaria I believe.

Is’nt this what is known as the ‘carry trade’? Interest rates are lower in Switzerland than in Poland so it makes sense to borrow there. Also the Swiss franc would be viewd as a much more stable currency, and less vulnerable to sharp movements, so having your mortgage and OB in that currency offers some certainty

Most Hungarian mortgages are also denominated in Swiss Francs.

I’m not sure of the details of how it’s worked, but essentially it’s a carry trade. You borrow in a currency that has a low interest rate and that you hope has a stable exchange rate against your own currency. As Hungary and Poland are in the ERM with views to joining the euro, their interest rates are tied in to their exchange rate with the euro.

In theory this gives them stability against the Swiss franc. However, I believe I read somewhere that the Swiss franc is rising against the euro (or am I imagining it?). So mortgages in those countries may get more expensive.

However, the band between the CHF and the EUR is pretty stable in the long run (between 60 and 64 cent in the last year or so), so the main threat would come from a the national currency coming under pressure causing it to have to vastly raise its own interest rates and then dropping out of the ERM altogether and allowing a de facto devaluation of its currency - a la Norma Lamont in the UK.

I presume Hungarian and Polish banks do the borrowing and then offer the mortgages locally?

OK thanks Gekko. But are we talking about the whole mortgage business of Poland ? If rates are lower to borrow in CHF, why would anyone in Poland have Zloty mortgage ?

Or is this for sub-prime customers, and I’m not understanding something ?

Do customers have flexibility to re-denominate the debt if interest rates move ?

Thanks in advance

I am not too sure about Poland but financing your mortgage in a currency other than your own is quite common in Hungary. I suspect that it is quite common accross much of Eastern Europe.

With local interest rates often at least twice or three times the level of European or Swiss interest rates, local borrowers often borrow in euros, swiss francs or even yen. Obviously the borrowers faces a large (and prolonged) fx exposure but since these mortgages have lower current repayments they ‘seem’ cheaper.

In know that in Hungary, approximately 50% of all mortgages signed in the past year are so are denominated in currencies other than the Hungarian forint. If you can find a graph of how the forint has fared against the euro and swiss france over the past 6 months it becomes obvious how risky these type of loans are. I imagine that the lending banks hedge their exposure, but I doubt that too many of of the borrowers do.

This type of borrowing is their version of the 40-year mortgage.

About 80% of all new mortgages taken out in 2007 in Hungary were denominated in Swiss Francs. This is some risky stuff because in a credit crunch you’re expecting emerging market currencies to fall in value and haven’s such as Swiss Francs to appreciate.

AIB has the Polish subsidiary BZWBK but I’m pretty sure they only do mortgages in zloty.

Thanks lads. Lots to dig into there - ERM, carry trade etc.

This came out of a conversation where a Polish friend was wondering whether she could borrow, as an individual, from a Swiss bank, for a mortgage in Poland.

I’m sure she is being told whoever is “advising” her that “interest rates in Poland are x% and Switzerland are y%, therefore why not pick the lower one?”. As ever there is no such thing as free money without extra risk.

Quite so - but am I right in thinking it’s not something an individual can do anyway ?

Why would a bank in Switz. be interested in the risk of handling repossessed homes ?

And why would AIB’s Polish subsidiary decide not to offer this product ? If it’s prudence, is it not right to consider this form of lending as sub-prime ?

One wouldn’t call it a “carry trade”, which would imply taking cash on Zloty, paying cash on Euro.

SWiss France mortgages were popular in the UK in some circles in the late 1980s and many got burned. It is another route to getting yourself into “negative equity” and I never know why an owner occupier would do this, it really is unrewarded risk from their point of view.

Individuals can do it and have done so in very large numbers.

It’s not really anything to do with banks in Switzerland, any bank operating in Poland could offer these. The banks that do offer these have ready access to interbank markets (such as currency swaps and Swiss interest rate swaps) so they can hedge out their exposure to currency and rate movements. But the average person doesn’t have this ability, so there is more risk of default and that’s one thing the bank can’t hedge against.

As far as I know BZWBK don’t offer these because AIB has deemed it too risky.

Individuals can do it and have done so in very large numbers.

It’s not really anything to do with banks in Switzerland, any bank operating in Poland could offer these. The banks that do offer these have ready access to interbank markets (such as currency swaps and Swiss interest rate swaps) so they can hedge out their exposure to currency and rate movements. But the average person doesn’t have this ability, so there is more risk of default and that’s one thing the bank can’t hedge against.*

I meant, a Polish individual walking into a bank in Zurich and applying for a mortgage on a property in Poland.

Can an Irish person buy an Irish property with a japaneese or even US mortgage?? Surely we would all be at it??

The answer to Tom Parlon’s dreams, everyone borrowing in Yen!

I would guess that there are regulations against this. But I could be wrong.

Borrowing in another currency is another one of these products that is promoted by what I call Financial Buccaneers. It is akin to taking out an endowment mortgage, the market can turn, as is happening at the moment and the mortgage will not produce enough funds to clear the loan in the anticipated period. Alot of Endowment mortgages were given out between 1988 and 1995. I would not be surprised if some of these mortgages come up 50% short of expectations.

Only borrow in another currency if you have earnings in that currency. The Poles could get a Swiss Mortgage to buy a house in Poland, get a job in Switzerland and the mortgage could be paid off in a short number of years. It is financial murder for carry trade mortgages to be given to ordinary punters who have possibly just one salary from which to service the mortgage. In any case, carry trade should only be used to finance short term. In the longer term, one is exposed to the FX markets and is a headache that the ordinary punter should not be saddled with.

It is this kind of attitude that bankers have i.e. deceit, subterfuge that has us in the financial quagmire we are now in. They are so crooked that they do not even trust one another, and it appears that the only way that the house of cards doesn’t come tumbling down is for them to continue with their under handiness with the evident blessing of an inept authority.

It is quite common to have any bigger loans in CHF, not only mortages but also car loans are avaliable in this form. With big drop in USD rates I would exepect a USD mortages to be next big thing.

Some of you mentioned that there is some risk associated with exchange rate. Well, that is not so much the issue. At any moment you can change currency, if you have a bad feeling about CHF. Influence of currency rate change is not sigificant, if PLN would drop 20% your mortage payment would go up only 25%. It may sound much, but on other hand as we are to enter Euro our national bank(NBP) and ECB would stabilize currency - as it happened in Hungary (thank you all Euro taxpayers). The risk is in actual rates, even small fluctuation of rate of Swiss national bank in first years where you pay mostly intrest could have a tremendous impact on you repayment.

Now at some point of time our bank regulator has become concerned about it, as majority of mortages were in Swiss francs. So callled “Recomendation S” by financial regulator. It suggests that banks should use a lot of caution, assume Swiss rates would skyrocket, franc would appreciate and then calculate credit risk. They also have to suggest customer taking 50% more expensive mortage in PLN, and make him sign that he understands currency risk. On the side it also requests bank to evaluate LTV yearly, which could have interesting implications during price crash. Anyway recomendation is useless, as banks just readjusted their calculators of risk - they would calculate if you can repay 20% higher installment than planned, but calculator would slash cost of living by half. So it goes…

It has been proven that banks are reckless to lend money, so you might ask why Polish would take such risky loans. There multiple fundamentals that shield average Kowalski. First of all, as all you certainly agree, properties always go up in price - it was like that for a few years now. Second reason, Polish currency goes always up - also true for last few years. Above two reasons maked us crazy about buying, you would see queues in mortage departments, in my last Polish job people would discuss properties on lunch breaks all the time. You could see people that bought a aparement, and after a year or two it would double price and 20% of mortage would disappear. Third reason were Islands as we call UK&Eire. If you can’t repay you get a Ryanair ticket, and after half a year your finances are back to normal. So we started to take loans, credit cards so we could live the Western life… I would guess that back in 2000 if you asked people on the bus, they would not know what mortage is. Now every week some kind of credit advisor would call you.

Poland has nothing to worry regarding property market. Our 54 sq. m apartements cost 10-12 time average salary, so we have to take foreign currency backed 110% LTV loans 45 year which take 60% of income to pay them. We have been really waiting for them, since 1970ties there was little being build, and every goverment elected/send from Moscow did not help to solve the issue. When I talk with my Polish friends, who stayed home, about economy and politics (there are 2 out of 3 subject that every Pole is expert) they deeply admire Irish, as they could build so many houses per capita in one year. Our goverment is hardly working to make a second Ireland in Poland, at least they promised that. And 3 million apartments as well.

Thanks for that detailed post September. That’s scary stuff.

I remember seeing prices of apartments in Poland were similar to prices in wealthy German cities in the west. I thought that was a bit scary alright. And AFAIK the polish population isn’t as “young” as the Irish one. I.e. our boom/bulge is amongst 20 - 40 year olds with the peak in births back in 1980. I understand the Polish population is more typical continental european - i.e. bulge amongst 40 - 60 year olds.

Arise, thread, from the dead and live again…

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