Since autumn 2022, mortgages in Poland have been very expensive. The base rate is 5.75%, which is still very high. Recently, however, representatives of the Monetary Policy Council have been increasingly signalling that a rate cut is approaching with great strides. There have even been suggestions that it could happen as early as May. How could a potential cut of 50 basis points translate into loan installments? Experts from the GetHome.pl portal decided to check it out.
However, before we answer the above question, we should recall the dynamics of events. This was characterized by high intensity. Since 2015, borrowers in Poland have been taking advantage of cheap money. After a series of interest rate cuts, the reference rate was a record low – 1.5%. After five years of low interest rates, however, the COVID-19 pandemic came and it turned out that it could be even cheaper. In the spring of 2020, the Monetary Policy Council decided to cut it almost to zero. The base rate was 0.10%.
NBP shock therapy
This state of affairs meant another shift on the axis of record-low interest rates. However, later, when the economy began to be consumed by inflation, the NBP decided to apply a sharp brake and shock therapy for borrowers. Since autumn 2021, rates have started to rise again at an unprecedented speed. In just one year, they rose from almost zero to 6.75%.
The effects were devastating for those repaying loans, as well as for those who were just applying for a loan. The latter, due to both the dynamic increase in interest rates and the tightening of creditworthiness criteria, began to fall out of the market in hundreds of thousands. The former, on the other hand, received installments that were often 100 percent higher than a year earlier.
We can illustrate this with an indicative calculation. Let's assume that this is a 30-year loan, in the amount of PLN 500,000, with a margin of 2% and zero commission, plus WIBOR equal to the reference rate.
Before the series of increases, the installment equal to such an obligation amounted to an average of around PLN 1,870, but after the end of the cycle of interest rate increases, with the reference rate at 6.75 percent, our model borrower already had to repay PLN 3,900. The installment increased by over 100 percent.
In fact, borrowers got a breather in the fall of 2023. The Monetary Policy Council then cut the NBP main rate by 1 percentage point to the current level of 5.75%. If our model borrower took out a loan for PLN 500,000 for 30 years at such an interest rate, he would repay equal installments of PLN 3,580, which still means an installment higher by over 85% compared to 2021. The total cost of repaying the obligation with interest is almost PLN 1.3 million.
How much lighter?
Based on the announcements of the Monetary Policy Council representatives, it can be assumed that everything indicates that the reference rate will go down again for the first time in a year and a half and this could happen as early as May. This was recently suggested in the media by Ludwik Kotecki, one of the MPC members. In turn, the head of the central bank, Marek Glapiński, said that next year the NBP reference rate could fall to 3.5%.
If such a scenario came true, what would it mean for Kowalski's pocket as he repays his PLN 500,000 loan?
Assuming that there was an actual cut in May, the reference rate would be 5.25% and the loan installment would fall to PLN 3,410, which would be around PLN 170 less. If there was another cut of 0.50 percentage points this year, the installment of our model loan would be PLN 3,242, which is PLN 338 less, which translates into savings of over PLN 4,000 per year, and the total amount of the loan to be repaid (including interest) over a 30-year period would be PLN 120,000 lower.
However, if the words of the NBP president turn out to be prophetic and the reference rate for loans in Poland is 3.5% in 2026, then this gives an interest rate with a two-percent margin of 5.5%, i.e. 2.25 percentage points lower than at present.
In such a scenario, the model Kowalski, who has incurred a debt of PLN 500,000 for 30 years, would repay equal installments of PLN 2,800 per month, and the total amount to be repaid with interest would amount to slightly over PLN 1 million. Thus, the cost of credit with a zero percent margin compared to today would decrease by as much as PLN 289,000.
Will there be a happy ending?
It is no wonder that many borrowers are waiting for interest rate cuts. Poland has one of the highest interest rates in the European Union. However, will it be possible to carry out the entire cycle of cuts this time, or, despite the announcements, will we again only be dealing with a substitute or temporary action? It is difficult to predict at the moment. Without assuming a pessimistic scenario, we must take into account a number of conditions and the generally very dynamically changing geopolitical and macroeconomic environment on a global scale.
Author: Marcin Moneta, expert of the GetHome.pl portal
