June 4, 2019 Conversion of a loan is an operation of changing the currency in which the loan was granted to another one. The result is the conversion of the outstanding loan amount according to the current exchange rate of the new currency. Today, the topic of currency conversion concerns mainly loans in francs. The Frankish people have a real problem with the return of the loan in Swiss francs. Is currency conversion a profitable solution for them? We answer in the article.
Credit conversion – details
Only a few years ago, a mortgage in a foreign currency enjoyed great popularity. We could save a lot by borrowing, for example, in the Swiss franc. And so we did without paying much attention to exchange rate risk. Since 2004, franc loans have led the way, not only in Poland. Lower costs were enough to convince thousands of people to sign the contract. In 2015, the situation changed dramatically. The SwisNatl Bank decided to free the franc exchange rate. Due to its sudden increase, loan balances in francs increased by several dozen percent, as well as the amount of installments. Then the topic of loan conversion began to appear. In the case of loans in francs it is not an easy task, but more on that in a moment.
The loan conversion is the change in the monetary unit of the loan during the term of the commitment agreement. The currency conversion applies to the entire loan amount. This step only makes sense if the change in currency entails a reduction in the monthly mortgage installment. Let’s beware of impulsive actions!
The effects of changing currency
Conversion of the loan results in:
- repaying the entire remaining loan amount in the new currency,
- the need to pay a commission for currency conversion,
- raising or lowering the loan margin so that the loan meets the loan standards offered in a given currency,
- interest rate change resulting from different interest rates (the loan in PLN relates to WIBOR),
- additional costs of currency exchange, which the bank will inform us about.
Important! Conversion of the loan, and therefore the loan amount is converted at the current currency rate, not the date of the loan!
What is the commission for conversion?
“How much does a loan cost?” – this question comes to our minds first when we reach for the cash or mortgage loan calculator. The same should be asked if we want to convert the loan. Currency conversion is not a free service. The cost of conversion is primarily a commission depending on the value of the converted amount. It is usually between 0.5 and 1.5 percent.
In addition to the commission, you should expect a fee for preparing an annex to the loan agreement. It costs from 100 to 300 PLN. Therefore, before the final decision on currency conversion, we should be sure that this is a profitable move.
Currency conversion in francs?
Converting a loan in francs would translate the outstanding amount from the Swiss franc into PLN. However, this is not a simple topic. The loan would be worth converting only if the value of the franc fell to PLN and the growth of the currency was forecast. Frank, however, is not cheap, which makes the conversion of franc loans problematic. Converting a loan in francs at the exchange rate from the day the contract is signed would involve filing a lawsuit with the court. In turn, currency conversion at the current rate of the Swiss franc would mean a large increase in installments.
The government is trying to help frankers, but work on bills is still underway. President has already proposed, among others forcing banks to convert loans, which could cause some institutions to go bankrupt. Until recently, much was said about the franc bill, but today it is already known that it will not happen. According to research, Poles want to help franchise holders, but the government has not yet prepared any proper way out of this situation.
Alternatives to loan conversion
What to do? We can use other solutions and try to negotiate new loan terms with the bank. An interesting solution is definitely the extension of the loan period, the so-called loan extension. A longer repayment period would be the best chance to reduce installments. However, you should be aware of the payment for the extension of the loan period and thus the increase in the total cost of the loan.
You can also buy francs at a lower rate and then pay installments in a foreign currency. Banks should agree to this solution, but you should ask the department for details.
It is also recommended to create a financial cushion if our income allows us to do so. In this way, we will ensure a sense of security, e.g. in the event of job loss. Savings on the account allow us to calmly look for new employment, without worrying about systematic repayment of installments.
When does currency conversion pay off?
We already know that currency conversion pays off only when the benefits of currency conversion are greater than the costs necessary to bear. The rate of foreign currency in relation to the zloty should be as low as possible. Only then will we reduce the installments and eliminate the credit risk that has accompanied us since we decided to make a foreign currency loan.
A good moment to convert your loan is also to change the currency in which you earn. It’s always safer to earn and pay back the loan in the same currency.
To make sure that our choices are beneficial, it’s worth contacting a financial advisor. The expert will carefully assess our situation and suggest what solution is best for us.
Loan in foreign currency today – changes in Polish law
Pursuant to the provisions of the Polish Financial Supervision Authority, currently a loan in a foreign currency will be taken only by a person who obtains income in it. The ordinance applies only to mortgage loans. In this way, the PFSA wants to limit the risk that subsequent people will share the fate of franchisees. Receiving income in a foreign currency, we do not have to worry about exchange rate fluctuations and we can regulate installments without problems.