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Legal Eye: Currency and mortgages

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It’s easy to forget how far Poland has come over the last 20 years. In 1995, I paid cash for an apartment in Warsaw. Yes, it was carried in a briefcase. No, I was not wearing a pin-stripe suit or a fedora.

By 2003, my next apartment was financed by a bank credit secured by a mortgage. Even then, there was a choice of currency. However, the gauntlet of credit checks and other procedures required to prove sufficient household income was daunting.

By 2011, such mortgages are commonplace, and the Financial Supervision Authority (KNF) has updated one of its many Recommendations on best practices for consumer lending and mortgages, including loans denominated in foreign currencies.

Foreign currency limits

Although Poland has not suffered anything like the mortgage market crises seen in other countries, Poland’s own twist was the difficulties created by the jump in the foreign currency rates in late 2008. Originally adopted in 2006, Recommendation S addresses best practices for bank loans used to finance the purchase of real estate and mortgages.

The KNF issued a new and improved Recommendation S in January. Banks have until the end of the year to embrace this new version.

Despite the relative stability of the złoty over the past couple of years, the KNF is still concerned about consumer loans indexed against a foreign currency. Although the new Recommendation S does not place any limits on the amount of foreign currency loans in a bank’s overall credit portfolio, it does require stricter credit checks. For a foreign currency loan, the monthly payment is not supposed to exceed 42 percent of a person’s income. For złoty-based consumer loans, Recommendation T allows monthly payment amounts of up to 50 percent of income (or 65 percent for those in higher income brackets).


Since April 2000, when the Polish złoty was allowed to float freely, the market has determined exchange rates. While this sets the foundation for normal business transactions in Poland, it does mean that the rates can vary dramatically, such as the creeping rise of the złoty in 2007-2008, followed by its plummet in late 2008. In its Recommendation S (II), the KNF expressed its concern that individuals might not be fully aware of the potential risks of taking out mortgage-backed bank loans indexed to foreign currency. Recommendation S (II) was adopted in December 2008 and came into force in July 2009.

Above all, banks are required to educate individuals about the exchange rate spread,that difference between a bank’s buy and sell rates. Each bank is allowed to set its own spread. Ultimately, banks make money by buying low and selling high. In accordance with Recommendations S (II), however, banks should use the same exchange rates for customers making payments on mortgage-backed foreign currency loans as they offer to other customers.

Additionally, Recommendation S (II) requires banks to allow their customers to repay a mortgage-backed foreign currency loan in the currency to which the loan is indexed. In other words, if my loan is in Swiss francs, I could decide to pay in francs, and not złoty.

While the intention was good, the practical effect has been meager. In order to change the method of payment, an amendment to the loan agreement is needed, and banks typically charge a (sometimes substantial) fee for this favor.

Best practice

The “S” series of Recommendations are technically only a set of best practices. However, the KNF has the authority to audit Polish lenders, and it’s not likely to be pleased if a lender fails to implement applicable recommendations.

Finally, not every lender in Poland must comply with the KNF’s Recommendations.

For example, branches of foreign banks must comply with their home country’s financial supervision authority’s rules, and not Polish rules.

Source: Judith Gliniecki, Warsaw Business Journal, February 14 th 2011