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23^rd July 2008 - The strong Polish zloty (PLN) and its effect on foreign currency mortgages in Poland

If you had taken out a foreign currency mortgage in Poland in the past few years, you are currently laughing all the way to the bank (so to speak) when it comes to your repayments. Although most of the interest rates in foreign currency mortgages have risen (as have PLN interest rates), the concurrent strength of the Polish zloty has more than compensated, resulting in lower repayments in Polish zloty terms. This is because even foreign currency mortgages in Poland are actually physically paid by the borrower in Polish zloty at whatever the prevailing exchange rate happens to be.

by Andrew Balfour

In the table below, we take a look at the current and historic interest rates in the various mortgage currencies available for borrowing in Poland.

In all cases provided is the variable base rate, to which the bank will add its margin, which can be between 0.5% and 4%, depending on the bank and the offer. A competitive bank margin is normally in the range of 1-2%.

Table of Historic interbank rates used for Polish mortgages since 2005 (source, e-gamma.pl)

*Note that in the above table, Warsaw inter-Bank 3 month (WIBOR 3M) rates are used. Some Polish banks will instead use a 6 month rate (WIBOR 6M) as their base for PLN mortgages.

Also, for foreign currencies, some banks will use the London inter-bank 3 month (LIBOR 3M), as per above, whilst others will instead use a 6 month rate (LIBOR 6M). Also, some banks will use the Brussells traded 3 month or 6 month inter-bank rate (EURIBOR 3M or 6M).

Obviously, taking out a PLN mortgage in Poland means there is no currency risk. As discussed in a previous article, from a hedging perspective a PLN mortgage is prudent. In the worst case scenario, should there be a shock to the Polish economy, and a devaluation of the Polish zloty (PLN), then not only would the value of your property fall in real terms, but your repayments and outstanding loan amount would also fall in real terms.

However, if you have been looking at the course of PLN exchange rates in the past few years, you would be aware that it has done the opposite, and strongly appreciated against all major world currencies. As stated above, if you had elected to take out a foreign currency mortgage in recent years, then it has turned out to be a positive decision, with a very favorable movement in the ratio of the outstanding loan amount expressed in PLN in relation to the property value in PLN. With a concurrent increase in rental returns in this period, it would be rare for borrowers who took out foreign currency mortgages in this period to be in a position of having an investment property which is not paying for itself.

That was then, this is now. So, what currency should a new borrower in Poland choose? Of course, this is not an easy question to answer. Logically, a PLN mortgage in Poland makes the most sense, for reasons outlined above. However, as per the above table, PLN mortgages are now the most expensive in terms of interest rates (though bank margins are generally lower than on foreign currency mortgages). The base rate in Poland has moved up more than 2% over the last 18 months as a result of successive quarter point rate rises by the National Bank of Poland, reacting to inflationary pressures in the Polish economy. By contrast, USD interest rates have fallen by 2% since the start of 2008 in response to aggressive monetary policy from the Federal Reserve.

Table of PLN exchange rate movements against major currencies since 2005 (source, National Bank of Poland)

No-one can accurately predict the future course of PLN. It could be argued that at current levels of around 4/1 against GBP and 3.2/1 against EUR, it is overvalued, particularly looking at its historic average. However, there are important reasons as to why the PLN is strong and well supported – Poland’s economy continues to grow at a strong level (more than 6% GDP growth in the first half of 2008), foreign investment continues to flow into the country and there are billions of EU structural funds still to be spent improving the country’s ageing infrastructure. Inflation is high at more than 4%, but inflation is a worldwide problem at present (caused by high oil and food prices), and other countries in the same CEE region have much higher inflation.

If Poland’s government can meet the required economic targets, then Poland should be granted access into the common EU currency in about 2012. Ahead of this, the PLN/EUR exchange rate will be fixed, and then all PLN loans will convert to EUR loans.

The feeling at Poland Mortgage Direct is that the PLN will not fall significantly from current levels, but by the same token, will not rise much further. Instead, it will begin to trade in a band around the current levels.

On the basis of the information presented above, the most risk-averse borrower in Poland should choose a PLN mortgage. It is the most sensible mortgage currency in Poland (as discussed earlier), but at current levels, the most expensive in terms of having the highest interest rates. If the zloty falls from current against the borrowers income currency (be it EUR / USD / GBP/CHF), then the borrower benefits in terms of lower real repayments and outstanding loan balance. The opposite occurs if the PLN continues to strengthen.

The second most sensible mortgage currency in Poland right now would be the currency of the borrower’s income, so EUR for those in the Euro zone, GBP for the Brits or USD for Americans. Matching loan currency to income currency also reduces the currency risk. However, most investors in Poland will choose to rent out their property, resulting in PLN income to pay off the mortgage, negating this reduction somewhat.

The least risk-averse investor will simply choose the cheapest mortgage available, which at present is in USD or CHF. If the PLN continues to appreciate against these currencies, then the borrower will benefit from lower real payments and outstanding loan liability as expressed in PLN. If the PLN falls from current levels, the borrower will experience the opposite – an increase in PLN payment amounts and the outstanding amount expressed in PLN.

In all cases, if the borrower is not borrowing in PLN or their currency of income, then the complexity of the mortgage and potential for large fluctuations in repayment amounts is increased, as three different currencies are at play, potentially moving in favour of, or against the borrower.

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