I thought it might be a good idea to start a new set of articles by trying to recap market changes after COVID situation. COVID19 pandemic was a shock for many industries. I’ll try to briefly cover here how it affected mortgage market in Poland.
10% down payment – less banks available
Most banks have increased the minimum own contribution. Today, only three banks are granting loans with as little as 10% down:
In Pekao 15% is enough, other banks require 20% and more.
Limited availability in certain sectors
Most banks have introduced lending restrictions on the industries worst hit by the pandemic, that is, first of all, services.
Among the industries most often classified as “bad-risk” are:
- tourism and hospitality
- food service
- sport and recreation
- non-school education
- transport (passenger transport)
- event industry
A sole proprietor operating in one of the industries listed above will have to wait until the banks loosen the restrictions to apply for a mortgage. This applies as well to potential borrowers who have employment contract in one of the Covid-sensitive industries.
Tightening of credit policy towards all borrowers
Tightened credit policy is not only limited to selected industries but is also of a general nature. Here are examples:
- Most banks have stopped lending to borrowers whose income comes from civil law contracts (contract for a specific task, contract of mandate, in Polish: umowa o dzieło, umowa zlecenie) regardless of the industry in which the business operates. Since this type of contract is seen by banks as “more risky” than an employment contract, most banks stopped lending to clients with such an income source during the pandemic. Currently only 3 banks accept this type of income – two of them require at least 20% down and only one is fine with 10%.
- Income from temporary employment (fixed term contract) – some banks no longer accept income from this source
- Income from self-employment (all sectors across the board) – this group of professionals has always had it tough when it comes to getting a loan. I am currently witnessing further tightening of bank lending policy towards this group.
- Raising acceptance threshold for low-value customers – young age of the potential borrower (under 25 years), one source of income (when a couple applies for a loan and only one of them has income), income derived from a ‘less preferred’ source (civil law contract, sole proprietorship), no more than minimum own contribution – these are examples of features that lower a client’s credit score. A credit score below the level specified in a given bank will mean loan rejection, even if the applicant’s income is at the required level. Judging from the client applications I came across, it appears that banks have recently raised this bar, which means that the same client who would have received a loan before the pandemic is going to have difficulties now.
Already before the pandemic, some banks reduced the maximum amount of loan a borrower can take at a given level of income (affordability). After COVID, this trend has intensified.
In 2019, one of my clients who earns PLN 4000 under an employment contract received over 400k of credit. Today, he could get less than 300k in the same bank.
Lower interest rates
Due to the pandemic, central banks in many countries (including Poland’s NBP) have decreased interest rates. In Poland, we had three interest rate cuts so far, which led to 3M WIBOR (one used most often by banks) drop from 1.71 to 0.23. You can check historical WIBOR levels here: link
Most Polish banks use a variable rate based on the bank’s margin (fixed over the whole lending period) and the market rate WIBOR3M or WIBOR6M (varying, updated every 3/6 months).
WIBOR 3M (variable) + bank’s margin (fixed) = mortgage interest rate (variable)
Although the banks increased their margins (this started already before the pandemic), on average the increase in margin was smaller than the decrease in WIBOR, which means that overall mortgage interest rates fell.
I wrote more about interest rates here: link Today, if you have 20% of your own contribution, you can expect a margin of 1.9 – 2.2 p.p., which means that with WIBOR at 0.23 and a margin of, let’s say, 2 p.p., the interest rate on your loan will be 2.23% (a level that was unattainable prior to the pandemic).
What about banks’ attitudes towards foreigners?
Luckily, I haven’t noticed any changes here. My foreign clients (EU and non-EU citizens) continue to get positive loan decisions. No bank has announced any restrictions yet for clients who don’t have Polish citizenship.
The thing is that we don’t know. First of all, we don’t know yet what impact the pandemic will have on the market, because it’s too early to say for sure. We also don’t know if we should expect another lockdown, and that’s obviously a large uncertainty factor. Anyway, in the next posts I will try to draft first summaries of the Polish real estate and mortgage market situation after the pandemic. So stay tuned!
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