Today, if you get a 400k, 25 years mortgage loan in Poland, the estimated cost of interest over the entire repayment period will amount to approx 90% share of the total mortgage cost. That’s why the mortgage interest rate is a key factor when we compare mortgage offers. Moreover, the interest rate will vary over time, so you don’t know what will be the exact cost of your mortgage loan – we can only estimate it.

You will learn from this post:

what types of interest rates are most commonly charged on mortgages by Polish banks
what has been the development of interest rates in Poland in recent years
how your loan instalments will change if interest rate increase
I will also briefly discuss fixed-rate offers on the Polish market

Why is the interest rate crucial to the overall mortgage cost?

I mentioned at the outset that interest on a 400k loan for 25 years will constitute approximately 90% of all costs over the entire repayment period. This is just an example to give you the idea. It doesn’t matter whether the loan is 100k or 400k – if the repayment period and interest rate are the same, the percentage share of costs will be the same anyway.

The above calculations were made on the assumption that the interest rate is 3.8%. This is more or less the average rate that can be reasonably expected in Poland today.

It is important to note, however, that mortgage loans in Poland bear interest at a variable rate, so any forecasts concerning the cost of a loan over the entire repayment period can only be of an indicative nature.

Variable interest rate mortgage – that’s what you’ll get in Poland

Basically, all mortgage loans in Poland bear interest at a variable rate. More precisely, your rate will change in 3-month cycles. (Few banks use a 6-month interest rate but it makes no significant difference cause it’s at a similar level as a 3-month rate).

The mortgage interest rate is the sum of two components – the market WIBOR rate (variable) and the bank’s margin, which is fixed.

If you’re familiar with other mortgage markets (for example with the UK market), you may ask: what about other types of mortgages? Such as:

discount rate mortgages
only interest mortgages
fixed-rate mortgages (fixed for a whole mortgage period)

The answer is: you won’t find them on the Polish mortgage market. If we stick to the UK market as a benchmark, we can say that in Poland we have a ‘tracker’ type mortgages. Whereas in the UK the mortgage rate ‘tracks’ the Bank of England base rate, in Poland it tracks WIBOR (interbank market rate). WIBOR in turn, as you will learn later, tracks the National Bank of Poland (NBP – Narodowy Bank Polski) base rate.

Your mortgage interest rate will follow WIBOR 3M / 6M

We already know that the interest rate of your loan will be a sum of the WIBOR market rate and the bank fixed margin. We will now discuss these two components in more detail.

What the heck is this WIBOR?

WIBOR (Warsaw Interbank Offer Rate) is the interest rate at which banks grant loans to other banks, set and published every business day at 11.00 a.m.

So it is a so-called market rate, the level of which is independent of the bank that granted you a mortgage, as it is defined by the interbank market. Labeling 1M, 3M, 6M, 9M,12M refer to the duration of an interbank loan – 3M will simply mean a loan of 3 months, 6M of 6 months, and so on.

If your credit is based on the WIBOR 3M, the bank will update the interest rate of your mortgage every 3 months, adjusting it to the current market rate. Most banks in Poland tie their interest rate on mortgage loans to 3M WIBOR (only a few use the 6M WIBOR rate).

I can recommend you a good place on the Internet, which I use myself, where you can check current market interest rates (WIBOR, EURIBOR, LIBOR), as well as historical rates.

Here is a link: https://www.bankier.pl/kredyty-hipoteczne/stopy-procentowe/wibor

The website is in Polish, but the interface is very intuitive, so it shouldn’t be a problem for you to navigate it.

WIBOR 3M follows interest rate set by the National Bank of Poland:

I’ve used https://pl.tradingeconomics.com/poland/indicators – a webpage where you can find statistic data from many countries around the world, including Poland.

Bank’s margin – the key component of mortgage interest rate

The second component of the mortgage loan interest rate is the bank’s margin. Since WIBOR will be at the same level in every bank and is independent of any lending institution, it is the margin spread that will determine the attractiveness of a given offer. That’s why margin is a crucial factor when we compare mortgage quotes.

The term ‘margin’ simply means what the bank charges alone and what is technically it’s income. As in any other business, the entrepreneur adds their margin.

The margin is set in the loan agreement and may change only under specific circumstances. The bank will be able to increase its margin if you don’t meet the conditions of the agreement. The most common reasons for margin increases include:

insufficient inflows in the account
cancellation of one of the products required by the cross-sell conditions (e.g. termination of a credit card, an account or an insurance policy)
delays in the repayment of loan instalments (significant delays not a few-days delays)
failure to fulfil other obligations laid down in the contract.

Then it is important that you know the terms of your contract because any breach can result in the margin going up and you won’t be able to reduce it again.

But remember, margin are not everything and other costs (arrangement fee, insurance) are important too, as they can also make a large contribution to the total cost of the loan. You can read about these other fees in this article: Buying a flat on mortgage – let’s calculate initial expenses

Average mortgage interest rates in Poland [2Q 2018]

If you’re getting a mortgage in Poland in 2Q 2018, you can expect that your mortgage rate will be in range:

3,6% – 4,2% if you’ve got minimal 10% down payment (1,7 WIBOR + 1,9 – 2,3 bank’s margin)
3,4% – 3,6% if you’ve got at least 20% down payment (1,7 WIBOR + 1,7 – 1,8 bank’s margin)

Please bear in mind that the mortgage rate and overall mortgage cost depend on a whole range of factors, not only on your own contribution. If you want to get some good mortgage quotes , just meet with mortgage advisor – you will receive detailed information about your creditworthiness and mortgage affordability.

Fixed-rate mortgage offers

After Polish financial market regulator (Financial Supervisory Agency) baned mortgages in foreign currencies the main risk borrowers are expose to is interest rate risk. The solution to protect from that risk is fixed-rate mortgage.

At the beginning of this article, I mentioned that fixed-rate mortgage loans are not available on the Polish market. Actually, it’s not true. The question is how we define the “fixed-rate” mortgage. There are no offers with rate fixed over the lifetime of the loan. At this moment only three banks offer a mortgages with rates fixed for maximum 5 years term.

I will briefly describe all of them.

BZ WBK – 5 years 4,85% fixed-rate, then variable

BZ WBK offers a fixed interest rate of 4.85% for the first 5 years, after 5 years the loan will bear a variable interest rate (WIBOR 3M) with a margin specified in the loan agreement – 0.2 p.p. [p.p. – percentage points] lower than the standard margin.

In the standard option with a variable interest rate, for a loan with LTV at the level of 80% the bank offers a margin of 1.99 which means that the interest rate of the loan will be 3.69% (1.99 + 1.7 WIBOR 3M). This makes the fixed rate 1.16 p.p. higher (3.69% vs. 4.85%). How does this translate into a loan instalment? For a loan of 400k PLN for a period of 25 years the instalment will amount to PLN 2043 vs. PLN 2304 per month.

The difference in the rate is significant, but it must be taken into account that over the next 5 years interest rates in Poland will probably increase. The question is: how much and how long would it take for the fixed-rate option to become more cost-effective? I think this is a good subject for a separate article.

Deutsche Bank – 1,2,3,4 or 5 years fixed-rate, then variable or fixed for the next period

Then we have Deutsche Bank which gives customers a choice – the rate in the initial period is fixed, for 1, 2, 3, 4 or 5 years, and it’s sum of bank’s base rate increased by the bank’s margin. After this period, however, the customer has to make a choice – to stay at same fixed rate, or to switch to an interest rate based on WIBOR 3M rate.

For example, a 5-year rate of 2.55 pp and the bank’s margin of 1.8 (400k loan, 25 years, 20% own contribution), which gives a total interest rate of 4.35% for the first 5 years vs. 3.5% at a standard variable rate. In this case it’s translate into a instalments PLN 2189 vs. PLN 2002.

PKO BP – 2 years, 3.71% fixed rate, then update for a next 2 years period

PKO BP offers fixed rate for first 2 years period, based on IRS 2Y (Interest Rate Swap) – like a WIBOR it’s a rate set on the interbank market. At 7-05-2018 IRS 2Y is 1.9% and bank adds 1.81 p.p. margin (400k mortgage, 20% own contribution) which makes mortgage rate fixed at 3.71% for the first 2 years of repayment.

Although IRS 2Y rate is slightly higher than WIBOR 3M (1.9 p.p. vs. 1.7 p.p.) we got to keep in mind that the rate is fixed only for 2-years period and after this time bank will adjust your rate for a next 2-years period. 2 years fixed rate won’t protect you from interest rate risk exposure.

Interest rates in Poland in the past and mortgage interest rate risk exposure

At the beginning of this paragraph, I would like to point out that I am only expressing my opinion here. I am not a market analyst, I don’t know how interest rates will behave in the future and I do not have experience in making market forecasts. But I will try to give you at least a little insight.

Interest rates in Poland in the past

Interest rates, just like the economy as a whole, are known to be cyclical. In some periods they are higher, in others they are lower. If your mortgage is based on a variable interest rate, as the interest rates increase, your instalment will also increase. This means that you are exposed to the risk of an interest rate fluctuation. I would like to say a few words about this at the end of the article.

The chart below (downloaded from the website bankier.pl) shows changes in the WIBOR 3M interest rate over the course of the last 17 years.

At the beginning of 2001, WIBOR 3M rate was more than 18%! It is hardly surprising that the mortgage loan market in Poland was virtually non-existent back then and it started to develop only after interest rates dropped significantly. Can you imagine a mortgage loan for 30 years with an interest rate of 20%?

You may ask here: wait a minute, is it possible that the WIBOR rate will jump to 18% again and that the interest rate on my loan will be updated to 20% ? A good question. Unfortunately, I cannot answer it straightaway: yes or no.

Inflation and NBP monetary policy in Poland

As in other countries, interest rates are set in Poland by the central bank (NBP – the National Bank of Poland), more specifically by the Monetary Policy Council, chaired by the president of the NBP. Cutting and raising of interest rates is a core element of the monetary policy performed by a central bank and it is aimed at keeping inflation at a satisfactory level: high inflation is disadvantageous (just as too low inflation) for the economy.

Therefore the central bank raises interest rates to keep inflation low (I will not go into interest rate theory here because you will fall asleep or quit this website, if you want to read something more about it, go to https://www.investopedia.com/terms/m/monetarypolicy.asp). Believe me, that’s how it’s done. And in times when inflation drops, the central bank reacts by dropping the rates.

At the top, I have put a chart showing inflation in Poland from 1992 to 2017. When you look at both diagrams, they confirm the rule I have mentioned above – high inflation is high interest rates.

As you can see on Chart 2, in 1992 inflation in Poland amounted to over 46%! It was a period after the so-called political transformation, when Poland moved from a centrally planned economy to a market economy. Generally speaking, the Polish economy was in a state of turmoil.

Inflation was very high, so the interest rates were set respectively high because the central bank wanted to curb inflation. As inflation was falling, interest rates were gradually decreased and in 2015 reached their historical minimum (WIBOR 3M, 1.65 pp March-2015).

What when interest rates will rise?

Periods when inflation and interest rates are as high as in Poland in the 1990s typically do not occur in stable, developed economies and are more anomaly than a rule.

Poland is more often classified as a country with a developed economy and hardly anyone thinks that it will experience a double-digit inflation rate again. On the other hand, it is foolish to expect that the rates will remain at the current low level forever.

If you take out a mortgage loan in Poland, the bank is obliged to inform you that you are exposed to the risk of interest rate fluctuations and to show you how the instalment will change if WIBOR goes up by a certain percentage.

How does it affect your mortgage payments?

I will present a simple simulation that will show you what you can expect if WIBOR rises. I’ll use previous example of 400k, 25 years mortgae on 3,8% current rate.

If your current rate is 3.8% (WIBOR 3M 1.7 pp + 2.1 pp margin), the instalment of such a loan is PLN 2067. From the infographic above you can see how does it affect your instalment if rate go up for 1, 2 and 3 p.p. In the case when intrest rate hit the level of 6,8% (WIBOR 3M up for 3 p.p.) the instalment of your loan will be PLN 2776. It means significant increase in your monthly expenses.

How to protect yourself from an interest rate risk?

How do I secure myself against such a scenario? It is certainly worth having a “financial cushion”, which means a certain amount of savings that you will be able to use when you need it. Let’s say it should amount your six months income. This cushion will also be useful if you lose your job or other, unexpected expenses come up.

It is also worthwhile to make a realistic assessment of your ability to repay the loan. Not always taking the maximum credit we can afford at the moment will be a savvy decision. Consider whether in the case of a decrease in your household income by e.g. 20%, you will still be able to pay the instalments of your loan. You can judge your financial capabilities best by yourself, nobody will do it better.

This is the end of this article. If you have arrived at this point, I would like to congratulate you on your perseverance 🙂 I hope that I didn’t bore you to death with my dissertation on interest rates. Since you are here, it means you must be the kind of person who enjoys learning more.

If you have any suggestions about this article, please let me know in your comment below the article. This will allow me to adjust the content of the articles as much as possible in the future in order to achieve the aim of this blog – to deliver the maximum of valuable content in the most comprehensible form.

If you would like to talk about mortgage loans, you’re always welcome – write to me at kamil@polishmortgage.pl