Are home loans expensive or very expensive in Hungary?On August 22, 2019 by admin
You may wonder why the premium is higher than fixed rate products. The main difference between fixed and floating rate loans is that while in the case of floating rate products the future interest rate risk is borne by the customer, while in the case of over one year fixation, the bank bears. It is widely accepted that the bank is better able to manage this risk by directly or indirectly attracting fixed-interest funds to cover the risk. Considering that the client has a long enough time to adjust to the possible increase in interest rates at the end of the interest period, the bank’s credit risk is not higher in case of loans with a longer interest period. Therefore, the risks borne by the bank do not justify the significant spread between the two types of loans.
In the case of products with a fixed interest rate period
The possibility of early repayment is one that may justify different pricing compared to floating interest rates. For early repayment, it is worth distinguishing between the end of the fixed period and the early repayment during the fixed period. Early repayment at the end of the fixation has a much smaller negative impact on the bank, as the balance between assets and liabilities is re-established. Conversely, in the event of a prepayment during the fixation, the balance is disrupted, however, in order to offset these risks, the bank may charge the debtor a prepayment fee, so this risk is not necessarily justified in the premium. In addition, the rate of early repayments (which is currently very low) shows a fairly stable trend and thus its negative effects can be well estimated.
Theoretically, there are two possibilities when the number of prepayments is expected to increase. Either the general interest rate falls or the customers redeem their loans for a lower premium product. The former is not a reality at the moment as interest rates are in the deep. The latter case would be based on a rather strange logic, as the bank would essentially charge a higher premium because it expects compensation to replace its loan with a lower-interest product, while it may be less likely to occur at a lower premium.
Overall, therefore, such a difference is not considered justified between the two products. However, customers are willing to pay higher interest rates for security and banks are apparently taking advantage of this, indicating insufficient price competition.
Interest rate differences between banks
Another noteworthy phenomenon is that there are significant differences between banks in the level of mortgage lending rates. This is particularly noticeable in the case of fixed-rate loans, where the difference between individual banks’ offers is also more than 2 percentage points. So there is a big difference between banks when you look at the average interest rates that you have realized or even the list of conditions on the banks’ website. Thus, many institutions are able to offer competitive, affordable products on the home mortgage market. What’s interesting is that there is really no correlation between the size of the loan rate and the weight of the bank in lending. This may be partly explained by the composition effect, ie that some banks lend to a clientele that is justified at a higher premium. But it may also indicate that some customers choose a bank based on thumb rules, which suggests that there are frictions in product comparability, which hinders price competition.
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