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Analysis on the impact of interest rates on loan installments

The decision of the Monetary Policy Council of March 2015 meant a reduction in GFI rates to a very low level (reference rate: 1.50%).

Along with the rates of the Good Finance Bank, GFIC prices also fell. This rate informing about the cost of loans granted by banks directly affects the interest rate on many loans (including mortgage and cash loans).

Everything seems to indicate that after a period of very low GFI rates and GFIC rates, we will be facing a significant change. Most analysts expect an increase in these rates in 2018.

Such a hike will increase, among other installments on all mortgages and many cash loans. Holders of “mortgages” will face the most painful change in their home budget.

Soon the loan installment may increase by USD 70 – USD 100

money

Housing loans have two features that are important from the point of view of future increases in GFIC and GFI interest rates. First, these loans are the largest liabilities that Polish families have. The average value of a housing loan (outstanding) is around USD 190,000.

Secondly, virtually all housing loans granted by domestic banks have a variable interest rate calculated as the sum of the reference rate (usually three-month GFIC – GFIC 3M) and a fixed margin.

This interest rate structure exposes borrowers to the effects of changes in interest rates of the Good Finance Bank. In this context, it is worth remembering that GFIC – 3M always follows the main (reference) GFI rate and reaches a similar value.

Since March 2015, the GFI reference rate has been 1.50%, and GFIC 3M has been hovering around 1.70%. In the table below we have adopted 3M GFIC of 1.75% as the starting point. If this rate reaches 2.25% in 2018, the installments of four sample mortgage loans will increase significantly.

For a loan of USD 270,000 and a repayment period of 25 years (margin: 1.90%), this change will mean an increase in the equal installment from USD 1,374 to USD 1,448 . The corresponding increase will amount to almost USD 100 a month for a loan of USD 320,000 repaid in 360 equal installments.

The table below also includes installment estimates for significantly higher GFIC levels – 3M than 2.25%. It is worth realizing that not so long ago (at the beginning of February 2013), the quarterly GFIC quotations were around 3.75%.

At this level of reference rate, an equal installment of a housing loan of USD 270,000 and a repayment period of 25 years would be 308 USD higher than at present.

Such a change could exceed some household budgets. Therefore, home loan holders should now take advantage of record low interest rates and accumulate savings enabling safe repayment in the future.

Changes in installments of sample mortgage loans with an increase in GFIC 3M rate from 1.75% to 4.75% (fixed installments)

GFI rate hikes will be less severe for cash loan holders

GFI rate hikes will be less severe for <a href=cash loan holders … ” />

It is worth realizing that increases in GFI interest rates may also affect many holders of cash loans. I’m talking about people who have a loan with a variable interest rate. In the case of such loans, the interest rate is set as the sum of the reference rate (usually GFIC) and a fixed margin.

The difference to mortgage loans is a much higher level of margin. Information on the interest rate on cash loans can be found in the contract concluded with the bank and in the information form.

It should be noted that many lenders in advertising materials do not provide accurate information on how to determine the interest rate. Usually, only a general mention appears (e.g. “9.00% floating rate”).

The impact of higher interest rates on installment levels can be checked by taking into account the following two examples:

  • USD 15,000 loan, repaid for 3 years, margin: 6.00%, commission: 15.00%, current interest rate: 7.75%, the preparation commission is credited
  • loan of USD 50,000, repaid for 10 years, margin: 8.00%, commission: 9.00%, current interest rate: 9.75%, the preparation commission is credited

The current installment of the first loan is USD 539. With the GFIC – 3M rate rising to 3.75%, the corresponding value will be 555 USD (16 USD more than at present).

After the change in GFIC from 1.75% to 3.75%, the comparable installment of the second loan will amount to 61 USD (change from 713 USD to 774 USD).

The above examples suggest that the increase in GFIC will be noticeable only for cash loan holders who, in addition to variable interest rates, also have a large value.

Cash loan holders may be able to protect themselves against an increase in interest

cash

As a summary, it is worth mentioning that cash loan holders may be able to protect themselves against the effects of an increase in GFI interest rates and GFIC.

People who are just thinking about borrowing money should pay attention to loans with a fixed interest rate. Such loans are offered, among others 

If you already have a cash loan with a variable interest rate, you may want to consider a different solution. It involves refinancing/consolidating the debt with the help of bank lending funds at a fixed percentage.

It is worth knowing that mortgage holders will not free themselves from variable interest rates due to debt consolidation or refinancing.

Consolidation loans secured by mortgages, because they have a variable interest rate (its sum calculated GFIC and constant margin).

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