Franc loses appeal for European homebuyers

Solid foundations? More than half of mortgages taken out in Poland recently have been in francs caro

Eastern European homebuyers are losing interest in Swiss franc mortgages following the currency's recent appreciation and the high cost of obtaining it.

This content was published on November 10, 2008 - 08:06

The practice of taking out franc loans has been rife in countries such as Hungary and Poland where interest rates are traditionally higher and the local currencies are relatively unstable.

It is estimated that more than half of mortgages taken out in Poland in recent years have been in francs while the vast majority of Hungarian homebuyers prefer foreign currencies, with an emphasis on the Swiss franc.

The Swiss National Bank (SNB) estimated that some SFr350 billion ($300 billion) in Swiss franc loans were outstanding in Europe at the end of 2007. The SNB also calculated that nearly a third of all Austrian mortgage loans are taken out in francs rather than euros.

But the recent sudden appreciation of the franc, traditionally a safe haven currency in times of financial turmoil, has seen the size of these loans swell in relation to earnings in local currencies.

In addition, banks have been reluctant to lend to each other in the midst of the financial crisis, forcing up the rate of interest at which Swiss banks will lend francs to their European counterparts. These increases have been passed on to consumers, further hiking monthly repayments.

Pain predicted

"At the height of the franc appreciation monthly repayments went up by as much as 15 per cent," Thomas Boldizcar, from Hungarian mortgage brokers Budapest Mortgage, told swissinfo. "But conditions have eased somewhat recently."

"People took out loans in Swiss francs because it was seen as a relatively stable currency and interest rates in Switzerland were less than in other European countries."

Observers and some financial authorities had been concerned about the possible consequences of exchange rate fluctuations for some time.

"Why did people not consider the risk that the exchange rate would go against them? They thought the risk was low, but you can't predict that with any certainty. Now they are stuck," Professor Peter Bossaerts from the Swiss Finance Institute at the Federal Institute of Technology in Lausanne told swissinfo.

Banks in Austria, where homebuyers are facing the same predicament, stopped lending to domestic retail customers in foreign currencies last month. The Polish financial authority has issued regulations to control the same practice and on Thursday called on many banks to stop offering Swiss franc mortgages.

"In our opinion it is safer and more reasonable to take out mortgages in the same currency as a client's income currency," the Polish financial supervision authority said in a statement.

Euro in favour

Banks in eastern Europe are facing franc shortages because their Swiss counterparts have hiked up the rate of interest at which they are prepared to lend.

The SNB alleviated some of the problem by releasing currency to the European Central Bank that lends at more reasonable rates. It has also set up a similar arrangement with Polish bank Narodowy Bank Polski.

But many mortgage lenders in Hungary have switched to the euro in favour of the franc, according to Boldizcar.

Part of the reason is that the cost of borrowing has now narrowed between the euro and the franc. But another motive is that Hungary hopes to convert to the euro in the next few years.

"We will not see so much demand for Swiss franc mortgages in future unless the Swiss interest rates are dramatically reduced," Boldizcar said.

swissinfo, Matthew Allen in Zurich

Easing conditions

The Swiss National Bank on Thursday slashed its key interest by 50 basis points – the second cut within a month. The move was partly made to control the appreciation of the franc and bring the interest rate at which banks lend to one another (Libor) under control.

The Libor rate has escalated out of control in recent months as banks took fright at the financial crisis and stopped lending to each other.

The Libor had risen to 3.13% at one stage, taking it far above the SNB's target range, but it has since sunk to 2.56%.

The Swiss franc recently hit an all-time high against the euro of SFr1.43 but has since eased to SFr1.50.

The franc had also gained ground against a number of other currencies as investors took flight to the safe haven currency in the midst of financial turmoil.

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