• Thinking about buying an apartment for your own use? Are you worried about rising housing prices? Afraid you won't get credit in a while?
• UOKiK advises what to look out for when buying a property on loan.
• Calculate and don’t miscalculate! – this is the motto of the social campaign launched by UOKiK.

Property prices have been rising since the end of 2019, making many people think it might be the last moment to buy an apartment. - Many people thinking about buying a house or an apartment may be getting some information suggesting that property prices will not drop in the near future due to the ever-increasing demand and prices of building materials and land. This situation is further compounded by record-low interest rates which for many people may be an incentive to buy properties financed with loan. When buying an apartment or a house for one's own needs, it is advisable to always take into account risks such as the possibility of an increase in interest rates and, consequently, in the loan instalments, a change in one's life circumstances or a drop in real estate prices - says Tomasz Chróstny, the President of UOKiK .

Being tied to the apartment

- Buying an apartment for your own needs is not just an investment; for many people, it is a change in their living situation for years to come. The vast majority of mortgages are based on variable interest rates, which means that as interest rates change, so does your mortgage payment. When taking out a mortgage, one should also pay attention to how the bank will change the interest if the interest rate changes, how much is the private contribution, what is the loan margin and the terms of early repayment – adds the President of UOKiK.

Before taking any action, you need to answer the question what kind of property you need now, and what you will need in 5 or 10 years. This is all the more important if we finance the purchase of an apartment not with our own funds but with a loan. We then bind ourselves to the bank for up to several decades during which significant fluctuations might occur:

• interest rates - which affect the amount of the loan repayments;
• in the property market - increases or decreases in property prices or values;
• changes in the labour market that may affect our income. 

Being tied to a bank for many years - if property prices drop and loan instalments rise at the same time - that may make it difficult for us to sell the apartment or free ourselves from the loan in the future. 

Price increases and decreases in the property market

According to the House Prices Database (BaRN) of the National Bank of Poland, housing prices are now rising like never before. The chart below shows changes in the transaction price per 1 sqm of an apartment on the primary market for Warsaw, for the 6 largest cities (excluding Warsaw)[1]and 10 other cities[2] from Q3  of 2006 to Q2 of 2021

Source: Own elaboration based on NBP data.[3]

The current rapid increase in residential prices is caused by a number of factors, such as: high interest in purchasing apartments for investment purposes, which is especially true in the context of rising inflation, rising costs of contractors and construction materials, rising prices of building plots, the entry of large purchasers of apartments for investment and speculative purposes into the housing market.

However, it is important to bear in mind that this situation will not last forever. The faster and higher the price increase, the steeper and deeper the decline of prices. A similar phenomenon occurred in the past, when a sharp rise in residential prices between 2005 and 2008 was followed by a prolonged decline in residential prices between 2008 and 2012.

Risk of increase in loan instalments in the future

When buying an apartment you want to finance with loan, you will also need to keep in mind that loan rates may rise, thus increasing the amount of loan instalments. The vast majority of mortgages are based on variable interest rates, which means that as interest rates change, so does your mortgage payment. Currently, price increases on the residential market are further compounded by record-low interest rates. The 3M WIBOR reference rate is 0.1 percent. (as of 25 August 2021) and has remained at that level since May 2020. For comparison, in March 2021, it was 1.5 percent, and in 2012 4.91 percent in 2012. Therefore, the risk of it growing is very high.

The chart below reflects how the WIBOR 3M rate has evolved from 2012 to 2021.

It shows how dynamic the changes have been over the last 8 years: the WIBOR 3M rate has dropped from almost 5 percent in 2012, to 1,74 percent in 2015, and then it has decreased from 1.72 percent between 2020 and 2021 to 0.17 percent in 2012. This is how much interest rates on mortgages, in which a part of the interest rate depends on the 3-month WIBOR rate, have decreased. Currently, the rate is at a record low, but it is important to bear in mind that it can also rise to the values it reached in the past, such as 1.7 percent or 5 percent, or even more.

Below we present an example of a mortgage installment for different values of WIBOR 3M with the following assumptions: fixed installment, loan amount PLN 300,000, loan term of 25 years, bank margin of 2.75%.

For variable-rate mortgage-backed loans, the bank should present a simulation of the cost of the loan for different levels of the reference rate, including 3 percent, 5 percent and 10 percent as well as for the current loan rate plus 4 percentage points. Please carefully review such a simulation. It will tell you whether you are taking out a loan during a period of high interest rates (the chance that interest rates will fall) or during a period of low interest rates - as currently (the risk that interest rates will rise).

Terms and conditions of the loan agreement

Bear in mind that interest rates are not the only cost of a loan and that a lower interest rate does not always mean a more favourable loan. The terms of the loan you are taking can be found in your contract. Apart from the interest rate, pay attention to, among other things:

• how the bank will change the interest if the interest rates change;
• whether the bank will require you to contribute your own money and how much;
• what is the margin and other additional costs;
• what are the conditions of early repayment of the loan - whether the bank will demand a commission for it. Remember that the bank can only reserve the commission if all or part of the mortgage is repaid within 36 months of the contract date;

• what, if any, steps will the bank be able to take if the value of the property decreases?

Private contribution and LTV (loan-to-value) ratio

According to Recommendation S of the Polish Financial Supervision Authority, banks should require consumers to make a certain contribution when granting a mortgage. At the moment, it is at least 10 or 20 percent. The amount of your private contribution affects your  LTV loan-to-value ratio), which is the ratio of the loan amount to the value of the collateral (usually the value of the purchased house or apartment). The higher the ratio, the riskier the loan for the bank and the consumer.

Currently, the LTV ratio at loan origination, as a rule, cannot be higher than 80 or 90 percent (if additional collateral is provided). The higher the borrower's contribution, the lower the LTV ratio.

- During the term of the loan agreement, banks constantly analyse property market prices and the relationship between the outstanding loan amount and the value of the apartment or house that secures it. This is determined by the LTV - loan to value ratio. It is advisable to check in the contract if and what steps the bank may take if LTV exceeds 100 percent. - reminds Tomasz Chróstny, the President of UOKiK.

Calculate and don’t miscalculate! - UOKiK campaign

As part of the campaign "Calculate and don't miscalculate!" UOKIK prepared two 30-second video spots for TV and radio. They warn about the real loss of invested funds and point out the inability to repay the loan if interest rates rise. These video spots are available on public television and radio from 6 September. They are broadcast at no cost, pursuant to Art. 31(c) of the Act on Competition and Consumer Protection.

- I encourage media, institutions and NGOs to join our campaign. Any form of support for the campaign will help us reach a wider audience and improve consumer safety," says Tomasz Chróstny, the President of the Office of Competition and Consumer Protection.

The "Calculate and don't miscalculate!" campaign video spots and other downloadable content are available on the UOKIK website.

Konsument.edu.pl

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Consumer assistance:

Tel: 801 440 220 or 22 290 89 16 – consumer helpline
E-mail: [SCODE]cG9yYWR5QGRsYWtvbnN1bWVudG93LnBs[ECODE]
Consumer right advisers – in your town or district

Additional information for the media:

UOKiK Press Office
Pl. Powstańców Warszawy 1, 00-950 Warszawa, Poland
Phone +48 695 902 088, +48 22 55 60 246
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