The aim of the new rating introduced by the central bank is to enable domestic financial institutions to offer their customers cheaper and more transparent products, and that borrowers can easily and efficiently choose the most suitable offer for them. The first consumer friendly home loans have already been released, so here’s a summary of what you need to know about the concept before borrowing it.
How has lending been so far if you are not consumer friendly?
First and foremost, competition between domestic banks is forced by the blood refresh, as the average interest rates in Hungary are still very high by international standards. As noted by the MNB in its publication “Lending Processes”, domestic spreads are 2 percentage points higher than the regional average. However, obtaining a rating can bring greater financial stability and increased price competition, according to the central bank, which ultimately leads to cheaper borrowing costs for customers, which would not only negatively enhance borrowing but also leverage.
Another important mission of the new concept is to help clients make more informed financial decisions. As we have seen recently in the market for ethical life insurance, the central bank wants to make it easy and quick for home banking customers to compare home loans on a consistent basis.
The MNB expects that obtaining the rating and the resulting predictability will increase customer confidence in banks in the long run, resulting in more outward home loans and more profitable operations for banks, and a more transparent position for borrowers.
Strict will of the central bank
Just recently, in mid-May, the MNB’s Financial Stability Board determined exactly what criteria a banking product must meet in order to qualify for a consumer-friendly home loan rating. The main features:
- Only annuities are repayable, ie only equal monthly installments are allowed.
- There may be 3, 5, and 10 years in the interest period, or a fixed rate must be provided until the end of the term.
- The credit assessment deadline is a maximum of 15 business days after the valuation.
- The payout deadline is 2 business days from the date the conditions are met (unless the customer requests a later payout).
- The interest rate premium may not exceed 3.5% (relative to the creditor’s chosen benchmark). Otherwise, it is even 1 percent stricter than the change in the interest rate premium under the Fair Bank Act.
- Maximize Prepayment Charges:
- The disbursement fee is a maximum of 0.75% of the loan amount, but not more than HUF 150,000.
- The prepayment fee may not be higher than 1 percent of the prepaid amount.
- Home Savings Deposit is completely free of charge.
But what is an interest rate premium? The borrowing rate basically consists of the sum of two components, the reference rate and the interest premium. The more risky the debtor – ie unable to pay – the higher the interest margin.
How much change can the rating cause for such criteria in the market?
If they compete for the recommendation at all, credit institutions that cut a smaller slice of the market are likely to be prepared for major product conversion, as large banks may be in a better position to start with cheaper deals. However, there are some market players who have not yet decided clearly whether to qualify.