Certified Consumer-Friendly Housing Loans to reduce interest rates

Budapest, 11 October 2017. – All significant banks and savings cooperatives in Hungary offer Certified Consumer-Friendly Housing Loans: more than a hundred of these favourable mortgage loan products are accessible for consumers. Credit institutions on a voluntary basis requested the certification and undertook to offer housing loans with lower costs and interest rates than the average market rate, and to provide customer friendly service to their customers during the whole term of the loan.

Thanks to the certification framework of the Magyar Nemzeti Bank (MNB) announced this May, now 52 commercial and savings cooperatives – i.e. all systemically important market participants – offer 104 different Certified Consumer-Friendly Housing Loans with interest fixation periods of 3, 5, 10 years or the interest rate fixed for the whole maturity. These credit institutions disbursed almost 80 per cent of the total outstanding household debt in the last year.

Credit institutions offering Certified Consumer-Friendly Housing Loans

Source: MNB

The MNB has developed a consumer-friendly website and based on the data supplied by credit institutions an up-to-date loan comparison calculator was also launched (www.minositetthitel.hu) enabling customers to select the most appropriate consumer friendly housing loans. As the sets of conditions of the products are standardized, the comparison is not difficult. Consumers searching for housing loans may find on the website further, easy-to-understand details with regards to the conditions of the certified loans. By filling in this form, consumers may access more accurate and personalised offers relative to current comparison applications on the market.

Credit institutions are entitled to distribute the products which have obtained the consumer-friendly certification with the logo of the certification. The MNB created a dedicated Facebook page in social media to promote awareness of consumer-friendly housing loans. Zsuzsanna F?löp, spokeswoman of the supervisory authority, will keep in touch with the media, as the “ambassador” of the programme, thus providing assistance.

According to the MNB’s Loan and leasing selection application, which offers a presentation of consumer friendly products in a tabular form, in the case of products that are already on the market, clients of average credit risk may find a loan with the interest rate fixed for 3 or 5 years with an Annual Percentage Rate of Charge (APR) of under 5 percent. Loan with a 10-year interest fixation period may be taken out at an APR of 6 per cent, while the ones with a fixed interest rate for the whole term are available at an APR of approximately 7 per cent. These offers are less expensive than the average APR of housing loans previously offered by credit institutions.

According to the MNB’s market survey, for an average product of HUF 10 million with a 20-year maturity and a 5-year interest fixation period, the APR of a housing loan with the best market conditions is 4.46 per cent, while it is 3.89 per cent for a Certified Consumer-Friendly Housing Loan of the same conditions. In the latter case, the interest rate advantage of nearly 0.6 per cent suggests that a consumer must pay a total of HUF 698,101 less for the loan during the term if contractual performance is completed, excluding the favourable one-off borrowing costs. This means by HUF 2,909 lower instalments on a monthly and by HUF 34,908 lower instalments on an annual basis.

The price advantage observable in consumer-friendly housing loans, i.e., lower instalments, will be considered permanent expenditures in household budgets over the long term. All this supports medium and long term financial planning for families and strengthens their financial stability.

In addition to the APR and the monthly instalment amount, as interest rates are currently at a historically low level, it is advisable to mitigate the risk of a possible interest rate increase when choosing the loan. With a variable rate (linked to a benchmark interest rate), the consumer accepts the fact that the interest rate might increase resulting in higher instalments during a long maturity. However, if one opts for a product with fixed instalments that cannot be raised (within the interest fixation period) – and Certified Consumer-Friendly Housing Loans belong to this category – at the beginning one must pay a bit more, but one reduces or eliminates the risk of an interest rate increase in the future.

The MNB believes that, in the current interest rate environment, it is clearly the loans with longer interest fixation periods or with a fixed interest rate for the whole maturity that are safe. Choosing a shorter interest fixation period – although the loan may appear cheaper considering the APR – may be particularly risky.

With regards to consumer-friendly housing loans, the MNB needed to act as a positive and proactive regulator, because the competition for consumers is not sufficiently intensive in the domestic credit market. High interest rate spreads (i.e., the part of the interest rate which credit institutions charge to cover their expenses, costs etc. in addition to the funding costs of their liabilities) reflected the difficult comparability and transparency of the products in the case of loans with longer interest fixation periods.

The objective of the MNB’s Certified Consumer-Friendly Housing Loans is to improve the transparency of the housing loan market and the comparability of housing loans (with the elimination of information distortions) to reduce interest rate spreads and other expenses through more intensive competition, and to provide consumer friendly service to customers during the whole maturity of the loan.

Magyar Nemzeti Bank