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Office of Competition and Consumer Protection

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Change in property value - Calculate and don't miscalculate

< previous | next > 22.09.2021

Change in property value - Calculate and don't miscalculate
  • Are you worried about rising housing prices? What can happen when you take out a loan and the value of your apartment drops?
  • Can you protect yourself against unforeseen situations that may make it difficult to repay loan installments?
  • "Calculate and don't miscalculate" campaign of The President of UOKiK has been launched.

Housing prices continue to rise, and there is no indication that price growth in the housing market will slow down anytime soon. The Polish housing market is likely to remain in an imbalance for many years to come, with demand exceeding supply, which may further stimulate the purchase of residential units for investment purposes. The facilitations planned for some home buyers, provided for under the Polish Deal, may be attractive to many people who currently have a problem with obtaining a mortgage due to the inability to provide the required 20 percent of their own contribution. On a market like that, prices largely depend on demand, but also on the buying power of buyers, including their creditworthiness.

"Nowadays, when there is increasing talk of the interest rate rise, we may have to deal with a number of adverse factors working to the disadvantage of home buyers during the price surge", warns Tomasz Chróstny, the President of UOKiK,

Unfortunately, when thinking of buying an apartment on loan, you have to be ready for various situations.

"In the future, interest rate rise may result in lower creditworthiness for some consumers, but also in the increase in the amount of installments and the reduction of disposable income. As a result, with a decreasing valuation of the real estate that secures the loan, there may be additional consequences for the borrowers that they should already consider today", explains Tomasz Chróstny, President of UOKiK.

 "An investors who bought an apartment during a price surge may pay larger installments on the property whose value may temporarily decline. Moreover, investors should take into account an increase in the loan-to-value ratio, which is the ratio of the loan amount to the value of loan collateral (which usually means the value of the purchased house or apartment). So, if we add additional collateral costs due to an increase in the LtV ratio, the consumer could suffer a triple loss. That is why I ask to you to invest wisely and make use of our educational materials prepared especially for the "Calculate and Don't Miscalculate" campaign", the President of UOKiK recommends.

According to Recommendation S of the Polish Financial Supervision Authority, when granting a mortgage, banks should require the consumer to make at leas a 20 or 10 percent contribution or 10 percent, provided that additional collateral is established. During the term of the loan agreement, banks determine the LtV ratio by analysing, on an ongoing basis, the relationship between the outstanding loan amount and the value of the apartment or house that serves as a loan collateral. The higher the ratio, the riskier the loan for the bank and the consumer.

An increase in LtV ratio above 100 percent dramatically aggravates the consumer's accounting liquidity. The consequences are as follows:

  • Decline in the creditworthiness, i.e. in the possibility to incur further liabilities, e.g. for house repair or a car purchase, etc.
  • The consumer is, in a way, "tied to the property", e.g. it becomes difficult to replace the apartment with a bigger one, because the mortgage cannot be easily repaid by selling the apartment.
  • In the event of some life difficulties, such as an illness that requires expensive treatment, the sale of the apartment should provide the consumer with some disposable cash. In the case of LtV above 100 percent,  selling the apartment is not a solution to the problems as it will still not fully cover all the debts.
  • There may be an increase in the loan margin charged by the financial institution to cover the risk arising from unsecured funding. In extreme cases, the financial institution may terminate the loan agreement in the event of persistent failure to meet the LtV ratio requirement and in other situations specified in the agreement.

Mortgages are granted for many years, during which the situation in the housing market, and thus the value of the apartment, can fluctuate many times. Life circumstances of the consumers may fluctuate as well. We need to keep this in mind and consider additional collateral when we decide to become tied to the bank for many years to come. 

Additional collateral might be provided by the following:

  • own contribution higher than the minimum 20 percent – which means a lower loan and a lower collateral value;
  • the so called "financial cushion", i.e. the savings in case of temporary or unforeseen problems with loan repayment, e.g. illness, loss of job, sudden increase in the installment amount;
  • insurance – when choosing this form of collateral, you should carefully analyse the insurance contract to see whether the scope of protection such as illness, accident, loss of job corresponds to your needs and expectations.

"Calculate and don't miscalculate" campaign of the President of UOKiK

As a part of the campaign, UOKiK prepared two 30-second video spots for TV and radio. They warn of 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 the media, institutions and NGOs to join the 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 UOKiK.

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

Konsument.edu.pl

Are you observing more and more baits on the Internet regarding real property investing? New suggestions for alternative ways to make millions? Be careful! Visit konsument.edu.pl and learn about the consequences of reckless online behaviour.

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
E-mail: [SCODE]Yml1cm9wcmFzb3dlQHVva2lrLmdvdi5wbA==[ECODE]
Twitter: @UOKiKgovPL

Attached files

 

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